Reducing the impact of tax on your investments

2017-06-01 06:01

By Juggie Govender of East Coast Financial Services (Pty) Ltd – FSP44760

Several tax changes have been introduced in recent years. This year, dividend withholding tax (DWT) was increased to 20%, tax brackets were not substantially adjusted for inflation (only by 1%) and a 45% tax bracket was introduced. Last year, the capital gains inclusion rate was increased to 40% for individuals. The impact on investment returns is becoming an important consideration for investors and smart investment decisions can boost returns.

Saving tax efficiently - over the long term

Retirement funds remain the best option for long-term savings, allowing contributions of up to 27.5% of taxable income up to a R350 000 limit.
Provided investors reinvest the tax deductions received from SARS on contribution, retirement funds provide a tax-efficient option for long-term savings. Tax-free investment accounts also offer a tax-efficient way to supplement retirement savings due to compounded growth and no tax on income or gains, and no DWT being charged.
Contributions to a tax free investment account are limited to R33 000 per tax year and R500 000 in total, and cannot be replenished if withdrawn. The structure is therefore not ideal for short-term savings given the restriction on lifetime contributions.

Saving tax efficiently - over the short term

An investment option best suited to short-term savings (less than five years) is a normal discretionary investment. It provides unrestricted access to savings and investors benefit from interest exemptions and capital gains tax exclusions. Annual interest exemptions are R23 800 for those under 65 and R34 500 for those over 65, while the exclusion amount is R40 000 for capital gains.

· If you own a R200 000 investment which earns 10% interest per year, the interest exemption will provide a significant benefit to after-tax returns if you consider that investors will be charged tax at their marginal tax rate above the respective interest thresholds.

· And if you invest R250 000 in an equity unit trust providing 12% growth per year (no dividends assumed for ease of comparison), and switch equity unit trusts yearly (realising gains), the capital gains exclusion provides a similar benefit on after-tax returns.

Alternative options - Investors that are already utilising their annual exemptions and exclusions or have sufficiently contributed to a retirement fund and a tax-free investment account, should consider the potential tax benefits of an endowment for investment terms exceeding five years. An endowment is taxed in the hands of a life company and not the investor, removing any tax reporting responsibility from the investor.
Tax is charged on the investment at 30% for income, 20% for DWT and the capital gains inclusion rate is 40%. This provides a tax-efficient option for investors with higher marginal tax rates and trusts where underlying beneficiaries are individuals.

This article is an excerpt from PPS Investments.

You could contact me on 083 399 3905, my office on 032-944 3051 or e-mail me on for an appointment or further information and any other financial advice.

Disclaimer: The information is only intended to be of a general nature and should not be relied upon by any part without obtaining full details from a licensed financial service provider.




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