SA’s largest export product: Rich people

In an exchange in one of Nobel prize-winning author Ernest Hemingway’s many books, the rich are described as follows: “The very rich are different from you and me … Yes, they have more money”.

During a career in the money-world, now spanning more than 30 years, I’ve had the fortune of meeting and sometimes dining late into the night with many of the rich and once or twice with some very rich people.

The rich are not like you and me; they are smarter than the rest of us. Or at least that’s how I feel every time I spend time with some rich people. The rich people I’ve met have always left me feeling slightly inadequate, inferior. Not because they had more money than me, but because they were smarter than me, or knew something or spotted some gap in the market place which they exploited for their enduring financial benefit.

Heaven forbid that I actually meet someone like Elon Musk: SA-born founder of Tesla, SpaceX and Solar City. Who knows, I might have even brushed past him in the Fourways area where he grew up before he moved, first to Pretoria, and then to the US where he made his name and fortune. What would I say to him? What would I discuss?

I always made a point of asking these rich people for their secret to success. Many of these nuggets of wisdom I’ve remembered.

“Know more than anyone else about the industry that you are operating in, and you will succeed,” was something the late Anton Rupert, founder of the Rupert empire once said to me during a day-long session I had with him at his home in Sandhurst, called the White House. Rupert was known to be a stickler for details and had a memory like an elephant.

Another memorable, late-night dinner was with the very low-key and almost invisible billionaire Jonathan Beare, whose global wealth probably equals that of the Ruperts, but of whom virtually no one in South Africa knows about, or has even seen a photograph of in any media, locally or elsewhere. “Treat and respect your money as if it can be taken away in the morning,” he said … or something along those lines.

Who are the rich?

Rich people, also described by the acronym HNWIs (high net worth individuals) are defined as anyone who has $1 million in assets in addition to their primary residence. They also, for inclusion in the head-count in South Africa, need to live and work here as well.

The uber-rich have left South Africa a long time ago. I include amongst this group people such people as Donny Gordon (founder of Liberty Life), the Oppenheimers, Nathan ‘Natie’ Kirsh, the Menells and others. How they managed to get their vast fortunes out of the country under exchange controls, I do not know. I think many people just moved so much money offshore and simply one day hopped onto a plane and said goodbye to SA and hugged their money on arrival. Foreign exchange controls have always been for the lesser rich, I always say.

The rich in South Africa, more than anyone else, have a lot to worry about at the moment. Their assets – perhaps hidden offshore and/or  seemingly protected in trusts in South Africa – are already very much on the radar of the SA tax authorities, who are desperately looking for additional revenue as the traditional gushers of tax receipts start running empty.

The Davis Tax Commission, under the chairmanship of Judge Dennis Davis, has completed its final report and it’s clear to me that  South Africa’s 330 000-odd trusts are very much the target. If some of the recommendations of the DTC are accepted, it will be a serious blow to the careful estate planning strategies of a great many people over many generations. More about this in a future column.

Auditors and tax lawyers who have made fortunes over many years, advising their clients to transfer assets into trusts, will no doubt make even more money advising their clients how to get money out of these structures again in future. 

Special voluntary disclosure programme

And then there is the Special Voluntary Disclosure Programme (SVDP) which runs from October 1 to end June 2017. The SVDP, announced in the 2016 Budget earlier this year, differs from the amnesty on illegal offshore money (which took place in 2003/004_ in the sense that it’s not an amnesty. For many rich – and even not-so-rich – South African taxpayers the SVDP is literally a ‘last chance saloon’.

The driving force behind the SVDP is the Common Reporting Standards (CRS) now being rolled out amongst Organisation for Economic Co-operation and Development-countries and something called the ‘automatic exchange of information’.

In short, this means that over the next couple of years, every country in the world (except the US and possibly one or two rogue states such as North Korea and Somalia) will in future automatically exchange to all other countries information about the financial status of bank accounts, investment portfolios and trusts, even down to the beneficiaries of assets held in trust accounts.

Let me repeat: automatic exchange of information. If you make an acronym of this term it will read as AEOI…and if you pronounce it out loud it comes across as something that is hurting you.  

Whichever way you pronounce it, if you have undeclared offshore assets anywhere in the world, this will come and bite you one day. If not you, then your children or their children.

My discussions with some potential culprits highlight a serious misunderstanding of this issue. But again this topic is for a future column.

The relevance of this is that rich in SA, already under immense pressure from other sources, are facing a two-pronged approach by the authorities to get hold of some more of that wealth.

Free. Mahala. Verniet

Not unsurprisingly, there comes another threat in the form of the #FeesMustFall campaign, which dominated the news last week as it did in December 2015. Against the backdrop of increasing student unrest and campus closures last week, up popped an ‘academic’ study by a group of social science lecturers offering their solution to solving free university.

It’s simple, said the group on The Conversation website here, just tax the rich. The group, consisting of Salim Vally, Enver Motala (not that one), Leigh-Ann Naidoo, Mondli Hlatshwayo and Rasigan Maharajh….all academics in the field of education (it shows) has the following to say: “There are revenue sources that can be examined carefully and accessed to fund free education for all, at all levels. This can happen while other social needs are simultaneously met. The most important of these sources is raising more tax from the super rich and stopping the illicit outflow of capital.”

And when they say ‘free education’ they mean it well: all costs, including boarding, lodging, tuition fees, transport, books and even spare cash for entertainment. Note the reference to “other social needs” that can still be met. That surely must be universal access to free medical care and minimum wages, for a start.

The taxes will come from an extra tax on the top 10% of taxpayers as well as the HNWIs, defined as people earning more than R7 million per year and/or who have assets of more than R70 million. Bob’s your uncle and all that. In one stroke we can become the most socialistic country in the world – even surpassing those great socialist (but very wealthy countries) such Sweden, Norway and Denmark, which don’t provide free university education to all.

So what will the rich people of South Africa do, confronted by all these threats to their wealth?

Here’s the current problem: rich people are leaving South Africa in droves. I think the number is somewhat understated, but New World Wealth (NWW) reckons we only have 38 500 HNWIs left in South Africa. Last year (2015) was a particularly bad year as 980 HNWIs packed their bags and headed out, according to the calculation by NWW, as a result of the poor economy, declining currency and increasing political interference in business. Together with the 8 000-odd rich who have left South Africa since 2000, again according to NWW, this indicates a massive out-flow of rich people and their families, their assets and also their current and future income-tax they would have paid.

Where they went: 36% to the UK, 15% to Australia, 11% to the US, 8% to Canada, 5% to Mauritius and 4% to Israel.

Countries with biggest outflows of HNWIs

Source: New World Wealth

In the bigger scheme of things these are not huge numbers by themselves, but if you consider that more than 62% of all personal income taxes are paid by just over 100 000 taxpayers, then you can start realising the severity of the problem.

It’s long been a feature of our personal income tax that a declining percentage of taxpayers are paying more and more taxes.

I think several thousand more HNWIs will pack up and leave over the next couple of years. Some will leave to join their money held in offshore trusts, so as to escape declaration of their assets to the South African Revenue Service (Sars) in terms of the AEOI. Others will simply take what wealth they have via the R10 million offshore allowances over a year or three (R22 million per couple per year legally) and start a new life somewhere else, while they still can afford to do so. The internet has changed the way the world works and many people need little more than a computer, cellphone and internet connection to create and run a business.

I still feel that the R10+1 million offshore allowances per taxpayer per year could come under threat one day if the outflow of money accelerates again when the next financial crisis hits, which it will.

Mauritian invasion

On a recent to Mauritius I was astounded to see the ever-increasing number of South Africans, especially in the field of tax advisory, asset and trust management and property developers, who have set up camp on the island state. The South African presence is hard to overlook. Wherever you go you see signs of the South African ‘invasion’: Pam Golding, Seeff, Shoprite, Atterbury, Highveld Mushrooms, Pick n Pay, Nando’s and many more.

Mauritius would love to accept more rich South Africans on the island. Its recent budget announced significant tax-reductions for a range of companies, with zero tax rates for five years and in some cases eight years. The country’s investment promotion arm the Board of Investment has just opened a permanent office in Sandton, already host to the local offices for AfrAsia Bank and the Mauritian Commercial Bank, the largest bank on the island.

According to the latest Free Market Foundation survey, in conjunction with the Fraser Institute in Canada, South Africa has slipped, once again, on the list of countries on the Economic Freedom Index. We are now ranked at 105 out of 159 countries in terms of economic freedom and ease of doing business.

As recently as 2000 it was 42nd on the list.

Rich people, I dare say, will have taken their time reading this report (www.fmf.co.za), digesting the implications of it all. The not-so-rich would have been discussing and dissecting the implications of the break-up of Angelina Jolie and Brad Pitt. Perhaps that’s why the rich are rich….

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