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Planning Perspectives
Taxes you pay on investments
Palesa Tlholoe
WITH July being National Savings Month as well the start of the tax season in South Africa, this is a perfect opportunity to immerse yourself in the intricacies of how these two worlds affect each other. First, let's unpack some of the regular savings and investment products and their tax implications for South Africans who are already keen investors or savers: 1. Bank savings account. Any interest earned will be included in your income tax if the interest component is above certain limits. For individuals under the age of 65, you don’t pay tax on any interest of up to R23 800. For individuals over 65, R34500 is your tax-free portion. 2. Shares, unit trust investments and exchange traded funds. In addition to the tax on interest, explained above, most funds will also attract capital gains tax (CGT) on disposal. Switching of unit trust funds is generally considered a disposal. For individuals, there is a R40 000 exemption, and thereafter 40% of the gain is included in their taxable income and taxed at their marginal rate. Dividend withholding tax of 20% is applicable to dividends paid on shares. 3. Endowment policies. All taxes mentioned above are applicable, but taxed within the fund. The investment value is paid to the investor tax free and there’s no need to declare anything to SARS on your tax returns. 4. Property. Rental income received from a property is considered income in the taxpayer’s hands – normal income tax rules apply. The point is that, unless your money is sitting under the mattress (in which case it won’t grow at all), growth on your investments or savings is ordinarily taxed. However only growth is taxed, not your capital. What about tax-free investments? With the restrictions
that come with tax-free savings or investment products (A maximum of R36 000 in contributions per year and a R500 000 lifetime contribution limit), one needs to carefully consider how to implement a savings plan to take full advantage of compounding. Imagine a scenario where you invest R3 000 per month or R36 000 per year for about 14 years, reaching your lifetime limit of R500 000. You then stop but leave every single cent invested in order to grow within the fund for at least 10 years. Assume you invested in a growth fund, such as an equity or balanced fund, which, for example, gives you an average of 10% per year net of all fees. You should have R1 060 856 by year 14 when you stop investing, which is double your initial investment. Leaving this in the fund for another 10 years can deliver R2 751 587 by year 24. This is more than five times your total contribution of R500 000. Tax-free savings can be a great way to supplement your tax-free lump sum at retirement. Lump-sum withdrawals from retirement funds (pension, provident and retirement annuity funds) are taxed at retirement according to the lump-sum retirement tax table. You can take up to R500 000 tax-free. A tax-free investment, according to the scenario above, can be useful to supplement your retirement lump sum without worrying about tax. In closing, whether you decide to use the traditional investment options or a tax-free investment, there are tax exemptions, and a good financial planner can assist in structuring your savings and investment plans so you can benefit from most of these, especially if you’re in the higher tax brackets. Palesa Tlholoe, CFP, is co-founder and a wealth manager at Imvelo Wealth
