Old Mutual provides 2023 Budget wrap-up commentary

Johann Els, Chief Economist, Old Mutual Investment Group:

Eskom debt relief package welcome, but conditions could have been more demanding.

“The conditions are a little disappointing as one would have expected there to be certain targets to be met before payments are made, however, with that said the mentioned conditions are not inadequate”.

On the Eskom debt takeover and debt ratio

Els says the plan to phase the Eskom debt takeover seems credible and comes at the right time.

“Despite the Eskom debt transfer, the debt ratio still substantially improved from the levels recorded in October 2020,” says Els, but cautions that “we are not out of the woods yet”.

“There is a long, hard road ahead before we reach a situation where we could be rated as investment grade by ratings agencies,” he adds.

Els’s general budget scorecard

Did Treasury deliver relative to expectations: YES, MOSTLY

Continued Fiscal consolidation? YES

Eskom debt relief? YES

Credible economic assumptions? YES

Credible revenue assumptions? YES

Tax incentives for self-generation of renewable energy? YES

Credible expenditure assumptions? NOT

Els’s Budget likes and dislikes

Els says markets will like the following:

The emphasis on fiscal consolidation,
The primary surplus,
The ESKOM debt deal,
The tax giveaways for consumers,
Incentives for renewable energy,
No fuel levy increase,

But says they will be concerned about the following:

The small increase in the wage bill budget (only +1.6%).
Nothing in Budget for continuation of COVID-grant beyond March 2024, (but there are large contingency and unallocated reserves included in future budgets).
Some analysts might view the first part of the Eskom debt support (support for capital and interest payments) as expenditure – and that this should have lifted the deficit. Treasury is adamant that this is a balance sheet transaction and thus a move of debt from Eskom to the sovereign. This might be a grey area that could have some initial concern, but I do not think this is a serious concern.

Tiaan Herselman, Head of Advice at Old Mutual Wealth

A market friendly budget.

“While there were few surprises, investors should pay attention to the detail so that they can make use of all tax benefits associated with retirement funds and tax-free savings”, says Herselman.

Personal income tax tables have been adjusted with an inflation rate of 4.9%.
Individuals below 65 earning R30 000 p.m. can expect to receive a nett income of R25 217.
Individuals below 65 earning R50 000 p.m. can expect to receive a nett income of R38 697.
Individuals below 65 earning R100 000 p.m. can expect to receive an income of R68 810.

Commenting on the tax on retirement savings vehicles, Herselman says that retirement annuities or retirement funds are still great savings vehicles to reduce your income tax liability for the year with a deduction allowed for up to 27.5% of the greater of remuneration or taxable income limited to R350 000. These assets are still also exempt from Estate Duty unless you have disallowed contributions.

In simple terms if your income is R50 000 per month, your income tax liability would usually be in the region of R11 300 based on the latest income tax tables. But if you contributed R5 000 per month to a retirement annuity your income tax would reduce to R9 500 which equates to a saving of approximately R1 800.

“This is important because taking into account the tax benefits associated with retirement funds and tax-free investments, it is worthwhile considering additional contributions to retirement funds and then saving the tax refund received from SARS into liquid investments such as the tax-free investment or discretionary investments such as a unit trust,” says Herselman.

Any financial plan (when specifically planning for retirement), needs to strike a balance between income longevity; tax-efficiency and overall liquidity. These are important aspects to consider when choosing the most appropriate investment vehicle.

Lerato Bacela, Financial Director at Old Mutual Insure

On disaster management and climate change

We welcome government’s commitment to put measures in place to respond to the impact of severe weather events. As climate change impacts the continent, we expect to see a continuing increase in the frequency and severity of floods and hailstorms which will have a significant impact on claims experience in the short-term insurance industry. Government’s plans around disaster response services will hopefully mean that the damage we see from these events will reduce or be contained in certain areas.

On Energy and the electricity crisis:

As expected, the energy crisis was a significant topic in this year’s speech. In addition to pressures being placed on the consumer and particularly small businesses due to reduced economic activity, we are also seeing increases in power surge claims resulting from the frequent loadshedding. We therefore welcome the tax incentives that are being tabled aimed at alleviating these pressures. However, it is essential for the government to effectively implement these incentives and ensure that they have a meaningful impact on consumers. The success of the incentives will depend on the extent to which they are accessible, practical, and provide tangible benefits to those who need them most. We urge the government to ensure that these incentives are well-designed, well-implemented, and effectively communicated to consumers to help mitigate the impact of the energy crisis on the economy and small businesses.

Tarina Vlok, MD of Elite Risk, a subsidiary of Old Mutual Insure

On the solar panel tax incentive

We welcome the tax incentive rebate relating to the installation of new and unused solar panels, which is a positive step towards renewable energy generation. Homeowners who make use of this opportunity, need to ensure that the installation is done in compliance with the Electrical Installation Regulations of 2009 and that the electrician provides them with a certificate of compliance.

Only new solar panels and solar panel installations will qualify for the rebate. Whenever any renovations are done to your private home, it is very important to inform your insurer and to ensure that your buildings sum insured is adjusted to cater for the increase in rebuilding costs due to the installation of the solar system. It is important to note that criminals are targeting the theft of solar panels, so ensure that your security is extended to protect your entire property. The installation of electric fencing can go a long way in deterring theft of solar panels. Solar back up can also ensure greater protection against damages caused by power surges to electronic equipment.

Victor Mupunga, Head of Research I Old Mutual Wealth, Private Client Securities

Corporate Earnings under increasing pressure.

Tax receipts seemed to have held up better than one may have expected. Treasury collected R10.5 billion more than they expected at the time of the Medium-Term Budget Policy Statement in October. This suggests that despite the severe load-shedding in December, corporate tax receipts may have held up. However, should the highly disruptive load-shedding stages remain, we would expect corporate tax receipts to decline notably. Treasury is certainly factoring this into their forecasts and they also do not expect a continuation of the strong corporate earnings that we have seen in mining companies to continue. Assumptions over the coming year in the budget are that corporate income tax will decline by 3%. We believe this is a reasonable assumption, given that commodity prices, which were largely responsible for the corporate tax receipts have declined over the last year.

It’s also worth noting that in addition to the commodity price declines, the production volumes of most mining companies are under pressure. This is either due to logistic disruptions, power cuts, or operational challenges and we expect this to continue throughout the year.

Lastly, from an investment perspective, corporates continue to hold back somewhat. Over the medium-term, this has a material bearing on profitability and informs treasury’s medium-term assumption of a 6% increase in tax receipts from corporates.

Michelle Acton, Retirement Reform Executive

Old Mutual welcomes confirmation of two-pot retirement date in Budget Speech

Old Mutual welcomes the confirmation of the date for the implementation of the two-pot pension as 1 March 2024 in the National Budget Speech today, 22 February 2023

Retirement Reform Executive at Old Mutual Michelle Acton said while industry still required National Treasury to publish the Draft Revenue Laws Amendment Bill, which had first been released for public comment in July last year, the confirmation of the deadline provided some guidance to industry in terms working towards readiness.

She noted that the amount of work needed to ensure readiness was far-reaching as entirely new and sophisticated automated systems would need to be developed to ensure that fund members could efficiently access the allowed accessible portion of their savings.

She said Old Mutual was also happy to receive confirmation that questions regarding outstanding issues of seed capital, legislative mechanisms to include defined benefit funds and legacy retirement annuity funds would be addressed in the draft regulations to be published. She said Old Mutual noted National Treasury’s decision to move the issue of the retrenchment benefit into phase two of the reform implementation only after the two-pot system was in place and settled.

However, Acton noted that the information was required as soon as possible because of the public process of commentary and responses before the law could be tabled in parliament and Gazetted. This timeframe had implications for the industry’s readiness for 1 March 2024.

Tax implications are fair

She welcomes the income tax table adjustments, which are in line with inflation including the medical tax credits.

“Overall, the budget is better than expected. The increase in the tax-free lump sum of retirement to R550,000 is going to be exceptionally welcomed by retirees, because that’s the amount people can take at retirement tax free. This increase, together with the adjustment in the lumpsum withdrawal tax tables of 10%, was a welcome change given these amounts had remained stagnant for many years.”

ENDS