Tuesday 15 November 2016

InsIde Today

VAT 101 explainedBUILDINGPERSONALWEALTH

We will be bringing your key to wealth as part of The Namibian every second Tuesday.Don’t miss the free service from the people’s paper.

VALUE added tax (VAT) is an ‘indirect’ tax. This means that the person who bears the tax is not assessed directly by Inland Revenue but indirectly through the taxation of transactions into which the person enters.

P2

With spending cuts announced by finance minister Calle Schlettwein on 27 October in his mid-term budget, a tax expert says the cuts will mean that for some of these businesses, revenues from government could decline.

“The challenge to Namibian busi-nesses in general would now be to find different revenue streams and to create new value by doing more

How the mid-year budget affects you

higher income tax brackets, should also expect an announcement on the proposed wealth tax in 2017.”

Hugo says the presumptive tax on small businesses could also affect sole proprietors. He says this will depend on how the taxation is designed and that Namibians will have to wait for the budget speech around February 2017.

*More details on taxes can be found at www.taxtim.pwc.com.na. Ques-tions can be submitted to taxtim@pwc.com.na

Stefan Hugo

Save this holiday season

For this Christmas season, make a reso-lution to manage your finances wisely by drawing up a budget for your family during the upcoming holiday period.

The purpose of a budget is to formal-ise the management of your finances and to have a clear picture of how much you earn as a family and how much you spend – your income and expenses.

To be able to draw up a household budget, you need to first understand the needs of all household members, including your children.

Involve your children in the budg-eting process to foster a culture of budgeting and savings at a young age.

Children will also less likely ask for any goodies outside of the household budget if they know what it includes, as well as its financial limits and goals.

Budgeting will also teach children that they cannot always have what they want when they want it, but that money should be put away to save enough to buy what they want.

Household budgets will differ from family to family, depending on the lifestyle of the family.

Draw up a budget that works for you and your family and include all expenses from groceries, water and electricity bills to clothing, eating out

at restaurants and car maintenance.Also ensure that you include savings

for unexpected expenses as well as unexpected increases in interest rates on your house mortgage, car payments, food prices and fuel price increases.

Any unexpected income should be put away for a rainy day or be used to make an extra payment on the family car payments or house mortgage.

One of the expenses that can build up in a short space of time is giving pocket money to your children.

To keep a proper record of how much you spend on pocket money, open a savings account and deposit money

on a monthly basis to avoid giving your children money every time they ask for it.

Budgeting not only helps families to manage their finances wisely, but to plan for unforeseen expenses.

Managing your finances wisely also helps you build a good credit history with the bank, which will help you in future, when applying for credit such as a study loan for your child.

*Jacquiline Pack is the executive officer for marketing and corporate communication services at Bank Windhoek.

•JACQUILINEPACK

EVERY year, many of us make the same mistake of not managing our finances properly. This is what puts us in a situation where we have to borrow to be able to afford a decent Christmas holiday at the end of the year or to pay for our children’s school fees and buy their school uniforms for the next year.

•CHAMWEKAIRA

THE government plays a significant role in the Namibian economy and many Namibian business people and SMEs have benefited from doing business with government in recent years.

business with the private sector and new Namibian investors,” says Stefan Hugo, tax leader at PwC Namibia.

Hugo says PWC has been bom-barded with a number of questions since Schlettwein tabled the mid-term budget review.

Explaining how the mid-year budget review is different from the budget tabled in February, Hugo says the February budget is a more extensive budget and covers the full year of government income and expenses as well as forecasts for the next five years.

“The main purpose of the mid-year review is for the finance ministry to check if we are on track with the full year budget, and if we are not, to ad-just the budget spending and income forecasts,” says Hugo.

Talking about some of the main points that came from the review, Hugo says the review showed that the government is not collecting the tax revenues it had forecast. This is due to a number of reasons including expecting decreasing prices of com-modities that are mined and exported by Namibia, the drought, reduced catches by the fishing industry, the weakened rand vs the US dollar and the general global economic slow-down, says Hugo.

“The minister proposed to cut, postpone and reallocate some budg-eted government expenses to keep the budget deficit under control. This is also to prevent the country from borrowing more money to finance the deficit.”

Schlettwein also confirmed that

the government is looking at ways to improve tax collections. He said the government would first look at getting government spending in line and as a last resort to introduce new taxes.

Hugo says some of the potential tax changes that tax payers can expect include the introduction of a presumptive tax on small business; proposals to eliminate some income tax and VAT exemptions; redesign the proposals for solidarity tax into a high income-based wealth tax and the ongoing research on the viability of introducing a Capital Gains Tax.

“With the heightened focus on compliance, taxpayers can expect increased Inland Revenue scrutiny of their tax returns and, for those not not registered for tax, possible audits of their financial affairs. Taxpayers in

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The power of starting early.

2Tuesday 15 November 2016 Building Personal Wealth

•CAMERONKOTZE

VALUE added tax (VAT) is an ‘indirect’ tax. This means that the person who bears the tax is not assessed directly by Inland Revenue but indirectly through the taxation of transactions into which the person enters.

Many people have some dif-ficulty in following the logic behind the VAT system initially but once they have mastered it, find it rather straightforward.

The essence of a VAT system is that all transactions entered into by any business are subject to VAT. If the business is the seller (or more correctly put in VAT terms the supplier of the good or service), it must charge VAT to the buyer (referred to as output VAT) and collect it. If the business is the buyer in a transaction, it will be charged VAT (referred to as input VAT) and pay it to the seller. The difference between the output VAT collected from custom-ers and the input VAT paid to suppliers for the same business is essentially tax on the value added by that business as in-puts (the purchases of goods and services) are converted to outputs (the goods and services sold by the business). This is the origin of the name ‘value-added tax’.

Inland Revenue collects the VAT from those businesses and individuals who are VAT registered.

Every second month a VAT registered person must submit a VAT return. In this return the taxpayer is required to de-clare the value of all sales and income generating activities and VAT on those transactions which are subject to VAT even if customers have not paid the VAT by the time the VAT return has to be submitted. This includes interest income, amounts received on the sale of second-hand goods and even the proceeds on the some goods sold that are not subject to VAT.

The taxpayer is also required to declare the value of all pur-chases and imports and the VAT on these transactions in the same return to the extent that the taxpayer is in possession of

a valid tax invoice for all local purchases. There is no need for the taxpayer to have paid the supplier for the VAT when the return is submitted. Included in this total VAT amount could be VAT charged to a customer that has not paid the VAT and the debt has been written off or a deemed VAT amount when second-hand goods are pur-chased for business purposes from a person who is not VAT registered.

The taxpayer is required to pay the difference between the VAT collected on the sales and income amounts and the VAT on the purchases and import amounts to Inland Revenue when the VAT return is filed. When the VAT amount on the purchases and imports exceeds the VAT amount on the sales and other income amounts, Inland Revenue pays back the difference to the taxpayer.

The VAT cost is essentially an expense for those who are not registered for VAT. If you are not VAT registered, you cannot claim any VAT paid on purchases or imports from Inland Revenue. VAT is es-sentially collected by Inland Revenue from those who can-not claim back the VAT when goods or services are bought.

VAT is essentially an in-clusive tax and any price charged by a person who is VAT registered is deemed to be inclusive of VAT. Prices that are advertised or quoted on price tags, catalogues, tenders or in contracts must include VAT if the seller is VAT registered. The seller may advertise a price excluding VAT but must then also disclose the VAT amount separately as well as the total selling price of the item sold including VAT.

*Cameron Kotze is a partner at Ernst and Young

•RELFLUMLEY

WHEN considering the right investment option. one also needs to look at the different risks involved and one’s appetite for risk.

Risk in general is the potential of gaining or losing something of value. Investment risk also works on this principle. Investment risk is defined as the potential of not achieving ones expected return for a particular investment. So how is risk measured? The common term in investment man-agement is standard deviation of historical returns. Higher standard deviation means that the investment carries a higher chance of not meet-ing one’s expected returns. Returns could be higher or lower than what was expected.

So what type of risks exist and

Understanding investment risk and risk profileshould be taken note of in an in-vestment?

To name and explain a few com-mon terms:

Interest rate risk is the possibility of changing interest rates and their effect on the underlying asset class.

Most asset classes benefit from lower interest rates in the short run but in the longer run there have been benefits to higher interest rates depending on economic conditions.

Business risk is linked much more directly to a specific company and sector and refers to the going con-cern of a business (the possibility of a company to repay debts and continue a profitable operation).

Credit risk is the possibility of a debt issuer not being able to repay all of its liability.

Inflationary risk is when inflation erodes the purchasing power of the relevant investment. Assume one buys a bond today at 5% and inflation is at 2% it seems like a good investment. However, if inflation jumps to 6%, the income

on the bond erodes the investor’s purchasing power as the income is lower than the rising costs.

Market risks will affect most securities in a similar manner. It is caused by uncontrolled factors and could have negative or posi-tive effects.

Social, political or legislative risks are the possibility of govern-ment or the social environment to change in favour or against securi-ties. This would include events like nationalisation.

Currency/Exchange rate risk is the risk of investment currency fluctuating and altering the value of an investment.

Any investment carries risk, but in an investment portfolio risk can be reduced. The first step is to diversify one’s investment.

This would not remove all the risk but because investment instru-ments react differently given the same event it would reduce the volatility in an investment profile. This is known as the correlation

of returns of asset classes. When it comes to risk, investment time horizon becomes very important. The longer the time horizon the more constant one’s return profile becomes.

Risk-reward is the concept of higher risk that should have a higher expected return. There are several factors to consider when deciding on a suitable risk level.

1. Time horizon – All investments should have a goal, whether the goal is retirement savings, travel plans one year from now or children’s education fund. Each investment has an expected time frame.

The shorter the time frame of the investment, the lower the risk profile is supposed to be. This is because one needs more certainty of the amount required at the end of the period. Longer investments can handle short-term fluctuations better and therefore could absorb more risk.

2. Money in the bank – It is unfor-tunate but the rich are in a position

to take up more risk because even if a loss is incurred, it is ‘affordable.’ The less you have the less you can afford to lose.

3. Current age – This is linked to the time horizon but it is accepted the younger you are the longer your time horizon becomes and the higher your risk profile can be.

4. Personal preference – Some investors are more conservative by nature and it is their choice to sac-rifice potential upside gains in term investments to regain certainty. Other investors prefer greater risk than advised. At the end of the day it is the investor’s choice.

Risk profiling is important to con-sider when talking about financial planning. This process would assist in determining the most appropri-ate investment strategy, taking into account the risk required, risk capacity and risk tolerance.

*Relf Lumley is portfolio man-ager at Capricorn Asset Manage-ment part of the Capricorn Group.

VAT 101 explained

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3Tuesday 15 November 2016 Building Personal Wealth

•AnshulKrishAn

BECAUSE traditional financial services are not designed for small depositors and borrowers, several non-traditional models have been able to scale up rapidly in this untapped market. But, without a strategic policy roadmap to guide further financial-technology (fintech) development, these new ‘connector’ models will remain limited in terms of the services they can provide.

Remember,if you plan your

finances well, youwill always have

enough money tospend and save.

KEEPinGAnEYE ... Money traders watch computer screens at a for-eign exchange brokerage in Tokyo.

In Kenya, the success of M-Pesa, a mobile payments app, has been noth-ing short of transformational. It took PayPal two Nasdaq listings and almost two decades operating in the US, the world’s largest economy to reach 188 million active customers and US$282 billion in annual payments.

Although M-Pesa has been operat-ing for less than a decade in a much lower-income market, it had nearly 17 million active users conducting more than US$50 billion in cashless transactions last year.

Similarly, bKash now dominates the payments system in Bangladesh to such a degree that ‘bKashing’ has become common Bengali parlance, just as ‘Xeroxing,’ ‘Hoovering,’ and ‘Googling’ are in English.

Other models, such as Microensure and Bima, have also gained ground, offering micro-insurance solutions in emerging countries.

Jan Dhan Yojana, a high-priority Indian federal-government program that provides access to the banking sector for the poor, has enabled 250 million new bank accounts to be opened in less than two years.

New fintech products will have to clear several hurdles to move beyond just improving access to financial services. Services fostering financial inclusion must deliver a high volume of low-value output, which means they often have to rely on partnerships to meet certain consumer demands. Problems arise when these partners have their own constraints or differ-ent priorities.

For example, Microensure and

Bima have made insurance solu-tions available to millions of people; but their services ultimately depend on independent insurers to allocate capital and underwrite insurance policies. Likewise, while there are green shoots of insurance-industry growth in regions like sub-Saharan Africa, global insurers must con-stantly adapt to regulatory changes in their primary or home markets, and it is unclear if they have the capacity to expand meaningfully into low-income countries.

Or consider M-Pesa itself. Four years ago, it formed a partnership with the Commercial Bank of Africa to add a lending tool, M-Shwari, to its suite of products. It has since opened more loan accounts than any Kenyan bank. But such accounts still number less than a quarter of active M-Pesa users, and M-Shwari still supports only small 30-day loans. M-Shwari is not a core part of either partner’s business.

Nor is it the only product of its kind on the market. The most recent competitor to challenge M-Pesa is mVisa, a partnership between Visa Inc. and two other Kenyan banks. With US$400 million in 2016 rev-enues at stake, Safaricom – M-Pesa’s parent company – will likely focus on defending its core offering before it tries to introduce new products. In Safaricom’s current list of new product priorities to expand financial inclusion, saving-and-loan products are ranked almost last.

Unfettered innovation and entrepre-neurship are necessary for connecting

Financial inclusion and beyond

the poor to the formal financial system; but, from a policy and development perspective, we need to shift our efforts toward improv-ing the larger ecosystem to realise new fintech products’ full potential.

For example, M-Pesa’s cashless transactions are underpinned by cash contributed by its customers, which is held in trust at any given time. Interest income from these funds is currently disbursed through

the M-Pesa Foundation. With a carefully constructed system, this money could be put to even greater productive use. India’s Jan Dhan Yojana programme has mobilised an estimated US$6 billion from newly acquired customers, which could be used to provide additional tailored products.

Emerging fintech services can take a lesson from the Chinese e-commerce company Alibaba,

which was quick in leveraging its payments platform, Alipay. After Alibaba launched its money market fund, Yu’e Bao, in June 2013, it be-gan reinvesting its Alipay custom-ers’ unproductive micro-deposits.

*Anshul Krishan, a senior fellow at Harvard’s Kennedy School of Government, is a former chief of staff of the International Finance Corporation.

Nampa-Reuters

lOADED... A teller at a money changer handles Indonesia rupiah bank notes in Jakarta, Indonesia.

4Tuesday 15 November 2016 Building Personal Wealth

As insurance brokers we wish to keep our clients and their possessions out of harm’s way this coming holiday and therefore wish to share some tips and

tricks with customers to safeguard their home and themselves on the trip.

In Namibia, some insurers deem the period between 15 November and 15

January a high-risk time and will not accept new clients, except under certain circumstances. Furthermore, all insurers have specified conditions under which they agree to insure the possessions, the most important one being the security meas-ures.

Check your policy schedule. If a loss occurs and there is a discrepancy between what you have declared and what is actually present you may face a limited pay-out, or your claim will not be entertained. Make sure what your burglary ex-cess would be. If you have an alarm system, have it tested before you leave. Lock both the outside and inside doors and close all windows.

Other checking mecha-nisms should include switching off the geyser and closing the main wa-ter connection; switch-ing off all wall plugs of electronic devices to avoid power surge or lightning damage and making sure fridges and freezers are switched on and plugged in. Surge protection devices are available from electron-ics or hardware retailers. Some wall socket multi-port adapters also have built-in surge protection, check if its indicated on the adapter.

Fit ‘fake’ cameras (available from secu-rity shops) outside your home. Invest in a few timer devices, which can be set not only to lights, but also to the television. Get a responsible and trustworthy friend or relative to home-sit or make unscheduled visits. Pay a distant cousin or neighbourhood teenager to paint your front wall or fixtures during your absence.

Last – but definitely not least – make sure your pets get the food, water and attention they deserve and love – this is a no-brainer. If this is not possible, book them into the SPCA or a dog bed and breakfast. They do not deserve to be left alone.

*Melissa Desai is team leader: consumer sales at FNB Insurance Brokers Namibia.

Keep your home safe this holiday

•MELISSADESAI

DECEMBER and January means summer holiday for many people and plans have probably been made to enjoy a holiday away from home, either at the coast or at another destination with family and friends.

SLOGANEERING ... Pensioners shout slo-gans as they march during a demonstra-tion against pen-sion cuts in central Athens.

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