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From a young age, as we sit through countless EMS lessons, we’re told that debt is a very bad thing. If we find ourselves in debt, we need to pay it off as soon as we can. No one wants to owe money to a bank, or worse – a shady loan shark with a penchant for baseball bats.
Still, there are times when we have no choice but to go into debt. A sad reality for many South Africans who live on credit cards just to feed their families. Commonly, we think of debt as credit card payments, loans, and vehicle loans. But there is such a thing as good debt.
Before we get into that, let’s first understand what bad debt is. Put simply, bad debt is any liability that won’t increase your personal wealth or that is used for purchases that won’t have lasting value. As mentioned above, credit card debt is a classic example of this. In a nutshell, you’re spending money you don’t have and paying it back with interest (if you’re not able to pay it back immediately, that is).
Adding fuel to the fire would be missing out on monthly payments, which affects your credit score, which could be to your detriment in the future when you want to make a big-ticket purchase like a house. Certain loans and vehicle finance schemes can fall under this category too.
Good debt is simply debt that has the ability to generate wealth for you (or your business) and possibly create value over time. So while taking out an auto loan to finance a sports car may be enticing, it won’t be beneficial to your finances in the future. Taking a student loan? Well, that’s different. That can be seen as an investment in yourself and your career. It’s the same story with a business loan.
A small business loan can give your fledgling company a much-needed boost, taking it to heights where more success is achieved. That loan may be debt in the short term but it gives your business an injection of capital to grow and create value.
Another example of good debt would be a mortgage. It’s seen as an investment – your property will most likely appreciate in value as the years go by, and you’ve got a roof over your head. More importantly, your money is going into your home – not into the pocket of some nasty landlord.
However, good debt also comes with risks. Just because debt is classified as ‘good’ doesn’t mean you can afford it – with any debt, it’s imperative that you sit down with your budget to determine if you can actually manage the financial responsibility in the long run.
Last week, I asked you to send me your finance and investment queries. Here, Danine van Zyl* of Brenthurst Wealth Management shares expert advice by providing answers to your questions.
If you and your spouse have a living annuity and one of you passes away, can the surviving spouse transfer the living annuity they’ve inherited over to their living annuity? What are the tax implications? I know that a living annuity is not included in an estate valuation. Also, can one transfer the annuity to the surviving spouse’s annuity?
Yes, the main benefit of a Living Annuity is that the investor may select his or her beneficiaries. On the death of the member, the dependants or nominees may select to take the benefit as an annuity and still receive the selected income between 2.5% and 17.5% on a monthly, quarterly, bi-annual or annual basis, as a lump sum (cash) or as a combination of both. Neither the annuity nor the lump sum will be subject to estate duty.
Who will be taxed on the lump sum benefit?
All commutations of annuities and Living Annuities are treated the same, irrespective of whether the commutation occurs during the member’s life or afterward, as long as the annuity directly or indirectly stems from membership or past membership of the fund. All retirement fund lump sums resulting from these commutations are treated as gross income and taxed according to the retirement fund lump sum benefit tax table.
The only difference in taxing these commutations lies in the application of the aggregation principle required by the special retirement tables. If the commutation occurs during the member’s life or upon the member’s death, the aggregation will occur in respect of the member. If the commutation occurs during a successor’s life or upon the successor’s death, aggregation will occur in respect of the successor. The position is thus that the lump sum paid to a surviving spouse will be deemed to have accrued to the deceased, so he/she will be taxed but the tax can be recovered from the surviving spouse.
- Danine van Zyl is a financial advisor at Brenthurst Wealth Management.
Have a question about share investing? Write to me at [email protected].
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