With it being tax season, it is very important perceive what taxes you could be confronted with and how they apply to your numerous forms of investments. Remember, though tax can by no means be prevented, you can construction your investments strategically in order to scale back your tax legal responsibility and, in flip, maximise your returns.
At the outset, let’s perceive the various kinds of taxes which will be relevant:
Income tax: Income tax, often known as pay-as-you-earn (PAYE), is calculated on a sliding scale between 18% and 45% relying on how a lot you earn. In easy phrases, the extra you earn, the upper your fee of tax. The tax bracket by which you fall determines your marginal tax fee which, in flip, impacts the speed at which you are taxed on any extra earnings.
Dividends withholding tax: Dividends withholding tax (DWT) is a tax payable on dividends obtained or accrued from South African listed firms or dual-listed non-resident firms. DWT is charged at a flat fee of 20% which is withheld by the corporate and paid on to Sars [South African Revenue Service] earlier than the stability of the dividends is paid to the investor, which implies that the investor has no additional tax obligations as soon as they’ve obtained their internet dividend. DWT is payable after the corporate has paid company tax of 28% on its internet income.
Capital good points tax: Capital good points tax (CGT) could be payable on the disposal of an asset, with the primary R40 000 of a capital achieve made in a tax yr being tax-exempt. Thereafter, any income made are taxed at a 40% inclusion fee, which means that solely 40% of the revenue you make in extra of R40 000 will be taxed. Capital good points are taxed at your marginal tax fee (see above), which means that the utmost CGT payable is eighteen% (i.e. 40% of 45%). Any unused portion of your annual CGT exclusion can’t be carried ahead to the subsequent yr, so it is very important use your exemptions strategically.
Now let’s unpack how your numerous forms of investments will be taxed, and how to strategically minimise your liabilities.
Cash and bonds
As a person taxpayer, you are liable to pay tax at your marginal fee on curiosity earned in your investments, together with money, bonds, stokvels and any cash housed in your medical financial savings account. However, remember the fact that South African tax residents are granted a tax exemption on the primary R23 800 earned per yr in respect of traders beneath the age of 65. For these over age 65, the exemption will increase to R34 500 per yr. When submitting your tax returns, native curiosity should be declared within the ‘Investment Income’ part of your tax return.
If you earn international curiosity, remember the fact that you will have to declare the rand quantity to Sars when submitting your tax returns and that no annual exemption applies. Once once more, you will have to declare international curiosity within the Investment Income part of your tax return, and you ought to be in a position to receive a deduction on international taxes already paid.
Shares
As an investor, any dividends that you earn from South African listed firms (or dual-listed non-resident firms) don’t appeal to earnings tax however are topic to DWT at a flat fee of 20%. Generally talking, if an investor holds lower than 10% of equities in a foreign-listed firm, any international dividends obtained should be declared and are topic to DWT at 20%, though Sars will permit a tax exemption which equals 25/45 of the rand worth of the international dividend (i.e. 55.65%), which will be lowered by any international tax already paid.
Importantly, remember the fact that you could be chargeable for CGT when you eliminate shares, so it is very important perceive the tax implications of doing so earlier than making a sale. Also, do not forget that you don’t pay CGT when your funding supervisor or DFM [discretionary fund manager] buys and sells underlying belongings in your portfolio. Where you are invested straight by way of a foreign-domiciled feeder fund, you will not be taxed on foreign money motion whereas you are invested – however when you realise all or a part of your international funding, the international capital achieve or loss will be calculated and translated into rands utilizing the common trade fee on the date of sale.
Endowments
If you are a high-income earner, you can profit from the beneficial tax fee afforded by an endowment construction. When taking out an endowment coverage, you swap your tax place for that of the life insurer which implies that as a substitute of paying tax on curiosity earned at your marginal tax fee, you are taxed at a fee of 30% – though remember the fact that no annual curiosity exemptions apply on this regard. DWT of 20% applies. While endowments could have sure tax benefits for higher-income earners, remember the fact that there are a variety of restrictive guidelines that apply to contributions and withdrawals, making them appropriate for an funding interval of 5 years or longer.
Reits
Real property funding trusts (Reits) personal income-producing properties resembling purchasing centres, workplace blocks, factories, warehouses, resorts and pupil lodging, to call only a few. Reits present traders with a lower-risk funding mannequin with a diversified portfolio of properties. Reits are taxed otherwise to different listed firms in that they don’t pay company earnings tax, and no dividends tax is payable on distributions. If you have Reits in your unit belief portfolio, all distributions should be declared when submitting your tax returns and are taxable at your marginal earnings tax fee. You will not be chargeable for any dividends obtained from Reits held in a retirement fund.
Tax-free financial savings accounts
While all contributions made in direction of a tax-free financial savings account (TFSA) are made with after-tax cash – which means that there isn’t any tax deduction on your funding premiums – no tax is payable on curiosity earned or dividends obtained, and no CGT is payable on disposal. While the tax advantages of TFSAs are usually not as vital as these provided by a retirement fund construction, this kind of automobile is extra versatile in terms of accessing your funds.
Retirement funds
Without a doubt, retirement funds [including retirement annuity funds] present traders with probably the most vital tax advantages. This is as a result of all contributions made in direction of a retirement fund – as much as [a maximum of] 27.5% of your annual taxable earnings – can be claimed as a tax deduction. Any over-contributions made in a given tax yr can be rolled over to the next tax yr for tax functions. Further, no tax is paid on any curiosity or dividends earned with the fund, and no CGT is payable on disposal. In addition, at retirement, an investor has the choice of withdrawing one-third of the fund in money, with the primary R500 000 being free from tax.