The Water Financial Pref Share Tax Impact
The tax impact of Water Financial’s A Preference Shares highlights the benefits of investing in this Smart Asset, and demonstrates how Mesh is making capital markets more accessible for investors.
Water Financial’s issuance of its ‘A’ Preference Shares on Mesh.trade offers investors monthly dividends, with the dividend rate calculated at 87% of Prime. It also provides a tax benefit that highlights the flexibility of Preference Shares.
Water Financial provides home equity release loans (also known as “reverse mortgages”), which are extended as monthly loan payments to borrowers over a certain age. Reverse mortgages are a huge business in countries such as the United States, where people short of cash in retirement can tap into their home equity and receive a monthly dividend.
Unlike ‘forward mortgages’, which are loans used to buy houses, the borrower does not have to make any monthly repayments of the loan with a reverse mortgage. The loans are repaid when the borrower sells their property, chooses to move out without selling, or by their Estate if they pass away during the lifetime of the loan.
The residential property is used as security for the loan, so rather than having to sell their property, they are able to unlock liquidity in their largest asset and live their remaining years with dignity in the home they own.
Speaking to journalist Michael Avery on Fine Music Radio’s Classic Business show, Water Financial MD Chris Loker unpacked how tax mechanisms deliver enhanced investor returns.
Loker explained that this issuance allows Water Financial to scale up their business. “Essentially the dividend matches what we’re charging borrowers,” he said. “We are passing that return on to the preference share investors, and the tax consequence is that we are paying gross Prime +2.25. Because it’s corporate tax, because it’s a dividend, it delivers a 10.225% net yield (at the current prime rate).”
That is true for companies. The calculations for individuals are different, but still appealing. Individual investors in South Africa are currently subject to a 20% Dividend Withholding Tax (DWT) on dividend payments.
- Water Financial’s ‘A’ Preference Share yields 87% of prime which, given a prime rate of 11.75% (at August 2024), is 10.22%.
- If you subtract 20% DWT from that, the individual investor is left with after-tax returns of 8.176%, which compare very favourably with similar dividend-yielding products, which typically offer around 5.59% after tax.
For Illustrative Comparison only
After Tax Yields | Individual | Company |
|---|---|---|
Money Market Rate
(Source: Moody’s June 2024) | 8.20% | 8.20% |
Marginal / Corporate Tax Rate | 45% | 27% |
After Tax Yield | 4.51% | 5.99% |
Water Fin Pref Share Yield | 10.23% | 10.23% |
Dividend Tax @ 20% | 2.05% | 0.00% |
After Tax Yield | 8.18% | 10.23% |
Net Gain Above | 3.67% | 4.24% |
Interest Rate Equivalent Yield | Individual | Company |
|---|---|---|
Water Fin Pref Share Yield | 10.23% | 10.23% |
Dividend Tax @ 20% | 2.05% | 0.00% |
After Tax Return | 8.18% | 10.23% |
Marginal / Corporate Tax Rate | 45% | 27% |
Pre Tax Equivalent Yield | 14.87% | 14.01% |
Net Gain | 6.67% | 5.81% |
% Yield Enhancement above MM | 81% | 71% |
Note: Based on current (July 2024) rates and prime interest rate
Mesh MD Connie Bloem added that this preference share issuance opens capital markets by giving retail investors unique access to an instrument class that has traditionally been limited to banks and large institutions. “It’s an asset that retail investors, family offices, and trusts wouldn’t necessarily have had access to,” she said, underlining the tax benefits.
“On the ‘A’ Preference share, you will see that the rate on top of it is 87% of Prime,” she said. “Normally people would just make the calculation and say, ‘Oh, that’s a 10.225% return.’ Well, that’s not actually true. Your return is a lot higher than that if you take the tax impact into consideration as well and compare this to an interest-yielding alternative – making this a very stable, trusted asset to invest into. It also gives you a higher preference when it comes to the rest of the shareholders, and also the debt structures within the market.”
Listen to the full interview here:
Water Financial’s ‘A’ Preference Shares are available for a limited 1-week subscription period, from 23 to 30 August 2024, exclusively through Mesh.
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For more press information, please contact:
Connie Bloem, Product owner of Mesh:
hello@meshtrade.co / +1 604 671 4515