How disastrous is the impact of the new VAT rate on a client’s investment?
Much is being said about the new VAT rate of 15% that will become effective on 1 April 2018 in South Africa. Yes, we are talking about billions of Rands that it will raise, and as a consequence, leave consumers a little poorer, but I was keen to see the impact it will have specifically on investments. I will compare the outcomes using a set of fees with 14% VAT and then the same fees using 15% VAT.
First a caveat
There is a myriad of investment options, products, fees and structures that can be used in a client’s investment strategy. It is not my intention to explore every option or combination, but merely to do a study of the impact on an investment with and without a drawdown, using a given set of fees. I wanted to keep this as simple as possible.
The numbers
- The client is 42.
- Invests R 1 000 000.
- Upfront Fee: 1%
- Ongoing Advice Fee: 0.50% p.a.
- Asset Management Fee: 1% p.a.
- Platform Fee: 0.48% p.a.
All the fees exclude VAT.
Linked Investment with no drawdown
Comparing the numbers after 20, 30 and 40 years revealed the following:
After 20 years
- Value @ 14% VAT: R 4 856 630
- Value @ 15% VAT: R 4 837 043
- Difference: R 19 587
After 30 years
- Value @ 14% VAT: R 11 595 813
- Value @ 15% VAT: R 11 526 400
- Difference: R 69 413
After 40 years
- Value @ 14% VAT: R 27 686 458
- Value @ 15% VAT: R 27 466 759
- Difference: R 219 699
Conclusion
As will be expected, the longer the term, the bigger the impact.
The amount lost to the additional VAT of 1% in this scenario, is R 219 699 or 0.79% over 40 years where no drawdown is taken. The values provided above, are future values. Not a massive impact, but an impact nonetheless.
If we start looking at larger investments, then the amount in Rands will become significant, yet as a percentage of the overall values will still be in line with the percentage calculated above. If for instance, the client invested R 10 000 000 instead of R 1 000 000, we can expect that the difference after 40 years to be around R 2 196 990.
Linked Investment with R 250 000 drawdown
Using the same investment information as we did in the previous calculations, but after 20 years the client starts to drawdown R 250 000 (PV) per annum. We then investigate at what age the client will run out of capital and the difference in the last payment.
Age at which capital runs out
- VAT @ 14%: Runs out at age 71
- VAT @ 15%: Runs out at age 71
- Difference: 0
Because the capital runs out at the same age, I wanted to see what the difference in drawdown would be in that last year.
Final year drawdown
- VAT @ 14%: R 456 201
- VAT @ 15%: R 410 246
- Difference: R 45 955
Conclusion
In both scenarios, i.e. 14% and 15% VAT respectively, the capital lasted until the client’s age 71, but the client received R 45 955 less in income before the capital ran out in the 15% VAT scenario.
Again, there is no doubt that the new increased VAT will have an impact, but it is far from disastrous.
The same arguments will apply here for larger investments as we made earlier.
Other areas impacted by the increased VAT rate
There are other aspects of financial planning where we need to consider the new VAT rate of 15%:
- Executor’s Fees
- Impact on the client’s disposable income
- Commission, Advice Fees and Ongoing Advice Fees
- Transfer Costs, advertising costs, valuation fees (pertaining to deceased estates and other transactions)
What other areas did you identify where the new VAT rate needs to be considered when doing financial planning for a client? Please share your observations and thoughts in the comments below.
