Investments are taxed based on the type product that is used and as in life, all investment products are not created equal, especially when it comes to their tax efficiency.
Types of tax payable on investments:
- Tax on interest
All local interest earned is taxable, whether it be in a savings account, bonds or cash instruments within a unit trust and will therefore be taxed at your marginal tax rate. Individuals younger than 65 currently receives an annual local interest exemption of R23 800, while those older than 65 receive R34 500.
If your investment earned foreign interest, there is no portion that is exempted, but you can deduct any foreign tax already paid.
- Dividend withholding tax (DWT)
For equities (excluding listed property companies), dividends withholding tax (DWT) of 20% is withheld before it’s paid out to you or reinvested. In other words, when you receive the dividend, it is already the nett amount after tax.
- Income from Real Estate Investment Trust (REIT)
The tax regime of listed property companies in the form of Real Estate Investment Trusts (REITs) is more complicated than other asset classes. REITs do not pay corporate income tax, and their investors do not incur DWT on the distributions they receive. Instead, investors pay income tax on the distributions they receive from these REITS calculated at their marginal income tax rate.
- Capital Gains Tax (CGT)
A capital gains tax event is triggered only when you decide to sell (part of or all) your investments. If your investment has increased in value, it’s known as a capital gain, or a capital loss if the value has declined. Currently individuals receive an annual capital gain exclusion of R40 000. An amount of 40% of the remaining capital gain is then included in your annual taxable income. Therefore the maximum effective capital gains tax rate for individuals are currently 18%.
So, what difference can the product that you use make?
On a unit trust no type of tax relief is received. Neither on the income, return generated or the contributions made.
Tax is paid on all the income generated within the investment. This generated income will be in the form of interest and dividends and will be taxed as mentioned above.
Every time a switch between underlying funds is done, or you withdraw a portion of or the full amount of your investment, it will trigger a CGT event and you will pay tax on the capital gain, as mentioned above.
This does however not mean that a unit trust shouldn’t be utilised as an investment vehicle, since there are absolutely no restrictions on the product. You can invest as much as you want, wherever you want and in any asset class you want. You can also make withdrawals whenever you wish. A unit trust provides an investor with absolute flexibility and investment freedom.
An endowment policy is restricted to a minimum investment term of five years, but it offers tax benefits to investors paying a marginal tax rate of more than 30%, since it is taxable in the hands of the investment life company. The company is liable for tax in the portfolio at a rate of 30% for interest, 30% for all rental income (from property investments) and capital gains tax (CGT) at a rate of 12%.
An endowment is often also used for estate planning purposes, since you can nominate beneficiaries to immediately receive the money or to take ownership of the investment if you pass away, without generating executor’s fees.
Contributions to a retirement fund is tax-deductible up to a maximum of 27.5% of your taxable income (capped at R350 000 per annum). All the income and return generated within the fund are tax free, meaning you do not pay any of the taxes mentioned above.
At retirement you are allowed to take a maximum of one third in cash and the following tax table will then be applicable:
|Cash Portion (R)
|Rate of tax (R)
|1 – 500 000
|0% of taxable income
|500 001 – 700 000
|18% of taxable income above 500 000
|700 001 – 1 050 000
|36 000 + 27% of taxable income above 700 000
|1 050 001 and above
|130 500 + 36% of taxable income above 1 050 000
It is important to note that any withdrawals made from retirement funds in the past will impact the amount you can take tax-free at retirement.
The remaining balance will be transferred to a suitable product to provide you with an income. The income that you withdraw will be subject to normal personal income tax.
Tax-Free Savings Account (TFSA)
You do not receive a tax benefit for the contributions that you make to a TFSA, but all the income and return generated within the fund are tax free. Any withdrawals that you make will also be paid tax free.
The TFSA however has some other restrictions. You are not allowed to contribute more than R36 000 per annum or R500 000 during your lifetime. The whole collective investment scheme universe is also not available in the underlying funds, since there are strict limitations on the fees allowed to be charged.
Although each of these different products have a place and a purpose, it might be that your current investment vehicle is not providing you with the most efficient solution. Please feel free to contact me at email@example.com so we can help you determine which product is best suited to your financial needs and goals.