T is For Tax

The amount of tax you have to pay on your investment ultimately determines the net returns you’ll receive. High-income earners, for example, could surrender up to 40% of their investment income to the taxman. It’s therefore important to make sure that you know what to expect at the three stages of your investment: 1) when you contribute; 2) while you remain invested; 3) when you disinvest.

To not overcomplicate things, we limit our discussion to the tax treatment of the two most popular choices for personal savings: unit trusts and retirement annuities.

1. When you invest – how your contributions affect your tax bill

With a unit trust:

Currently, contributions to a unit trust fund is not tax-deductible, i.e. there is no tax relief for investing in a unit trust fund.

With an RA:

Your retirement annuity (RA) contributions could potentially cut your annual tax bill by several thousand rand. The receiver of revenue allows you to deduct RA contributions to the value of 15% of your non-retirement funding income from your taxable income before calculating the tax due by you. Your non-retirement funding income is that part of your earnings that is not used to calculate your contributions to your employer’s pension fund and could include items such as commission, rental income, bonuses or any business income earned by you.

2. While you are invested

With a unit trust:

You pay tax on the growth and the income from your investment, even if that income is not paid into your bank account, but reinvested in the fund. There are four types of tax that you need to pay attention to:

Dividend Withholding Tax (DWT):

For SA resident companies and non-resident companies listed on the JSE, DWT at a rate of 15% is levied on dividends declared. The tax is subtracted from the dividend and automatically paid to SARS on your behalf. You will therefore not pay a separate tax on these dividends, but you still need to declare the dividends shown on the annual tax certificate from your unit trust management company when filing your tax return.

Income tax on foreign dividends:

Dividends from non-resident companies enjoy an exemption of 62.5%, but you’ll pay income tax on the remainder. You need to declare the foreign dividends (shown on your tax certificate from your unit trust management company) to SARS.

Income tax on interest earned:

• With regards to local interest earned, if you’re under the age of 65, you don’t have to pay income tax on the first R23 800 of the interest that you earned from your unit trust investment. If you’re 65 years and older, the exemption amount is R34 500.

• Interest earned from foreign sources is fully taxable – no exemptions apply. You have to declare all your interest earned to SARS when filing your tax return.

Capital Gains Tax (CGT): You’re not taxed when the fund manager buys and sells the assets inside your unit trust fund. But a CGT event is triggered when you disinvest from a fund, whether that is by withdrawing money or switching between funds (see details below.)

With an RA:

You don’t pay any income tax, DWT or CGT while you remain invested in the retirement fund, which makes the RA a tax-efficient way to save for retirement.

3. When you disinvest

With a unit trust:

Capital Gains Tax (CGT):

If you sell an asset, including switching between funds and disinvestments, you’ll be taxed on the difference between what it cost you to acquire the asset and the selling price. In other words, you’re taxed on the profit you made from the sale. You have to declare the gain to SARS and CGT is levied at your marginal tax rate. You pay CGT on a fixed percentage (currently 33.3%) of the all the profits you made on selling assets in one financial year.

There are certain exclusions. You don’t pay CGT:

• when you transfer units from a personal account with a management company to a Linked Investment Service Provider (LISP) or the other  way around,

• when you donate units to your spouse, or

• if your profits are less than R30 000, as an annual CGT tax rebate of R30 000 applies.

For estate planning purposes, remember that the taxman treats your death as a capital gains event, i.e. your estate will pay tax as if you sold your unit trust investment on the day of your death, except that a CGT rebate of R300 000 – not R30 000 – applies in the year of your death.

With an RA:

Income tax on lump sum withdrawn

When you disinvest from an RA, whether due to retirement or emigration, you’ll be taxed on any cash that you withdraw at that stage. Currently the first R500 000 taken at retirement is taxed at 0%.

Income tax on retirement income

At retirement, any money that is not taken as a lump sum needs to be used to buy a compulsory annuity, i.e. either a guaranteed life annuity or a living annuity. All income that you receive from the annuity will be aggregated with your income from other sources (such as rental or business income) and taxed according to your marginal tax rate on your total taxable income

Consult an adviser if you are not sure about the tax implications of your investments

The information above is aimed at the most common scenarios of investing in a unit trust and an RA, and will apply to the majority of retail investors. There are, however, various tax regulations and exceptions to keep in mind. For simplicity’s sake, we’ve ignored the estate duty that is potentially payable at death. To ensure you comply with SARS’ requirements and to avoid losing out on exemptions, it’s a good idea to speak to a financial adviser or tax specialist for a tax-efficient investment that suits your circumstances.