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Financial PlanningPractice Management

Good versus Great

So you’re reducing taxes?

Income Tax started out by people deciding that there are certain functions in their community that they do not wish to perform and that they would be prepared to have others do for payment. From these origins of taxes it has now involved into probably one of the most hated words in the English vocabulary. And many people spend countless hours trying to minimise the amount of tax that they pay.

From large international companies that spend millions on tax structures to ordinary salaried employees that purchase more expensive cars to increase the tax deduction, people focus on reducing taxes. And although there is nothing wrong with ensuring that you pay the minimum of taxes, the focus is wrong. You see, the benefit of Income Tax for example, is that you only pay it if you have an income or make a profit. The easiest way to pay no taxes therefore is not to earn anything or make any profit and to become poorer.

Good financial planners will focus on reducing your taxes. They will show you that the most tax deductible motor vehicle costs R360 000 and that creating a trust will, in the right circumstances, save you estate duties. But saving taxes should never be the purpose of any financial planning. Financial planning is about maximising the benefits from your estate, while you are alive and for your beneficiaries after your death. And to increase wealth you need to increase your growth, while keeping costs under control.

And that is the way taxes should be seen: as just another cost in the production of income. Great financial planning focuses on the most cost-effective way of growing your estate. If your current motor vehicle of R100 000 is still working well, you might have R40 000 less to deduct from income tax and therefore pay R16 000 more, but you will save R96 000 in premiums on a new vehicle, leaving you R80 000 better off. The question is therefore where does the focus need to be?

Estate planning

The main focus is not to eliminate estate duty, but to ensure the smooth and efficient settlement of the estate. To obtain this, not only estate duties, but also all other taxes and costs will be managed. This will for example result in each structure being considered and being analysed to determine whether the benefits of the proposed structure outweigh the costs to implement it.

Negative implications, such as loss of control over one’s assets, will become of greater importance so as the requirement that the estate plan be compatible with the estate owner’s needs toward succession. For this reason it should form a tightly knit unit with the will of the estate owner.

As mentioned the implications of other duties and taxes such as VAT, transfer duties, income tax, capital gains tax and donations taxes will also be taken into consideration and the estate plan will be more than purely transferring the estate problem from one generation to the following.

Investment & Retirement planning

The focus should not be focused on tax avoidance, but investing on certain time honoured principles. It is true that the saving of tax is one of these principles and still plays an important part, but it should not be the be-all and end-all of the planning. Tax efficient products such as retirement annuities should therefore continue to play a substantial part of any investment plan.

The other principles are however:

  • Flexibility
  • Risk
  • Needs of the client
  • Costs
  • Capital growth

The most important one of these is the needs of the client. What is the level of income that is required, what is the level of liquidity requires and how will the investment fit in with the rest of the investor’s estate. Only after these questions are answered can the others be addressed.

And that is most probably the answer to the difference between good and great. Great financial planning is holistic in nature. All of this might seem extremely self evident, but next time you make a financial planning decision ask yourself: “Am I doing this to avoid taxes, or am I doing this to increase wealth?” “Is my financial planning process good, or is it great?”

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