TAX AND INVESTMENT VEHICLES

BEST OPTION: ENDOWMENT POLICIES MAKE SENSE WHEN TAX RATES ARE HIGH

Retirement funds – retirement annuities (RAs), pension funds and provident funds. Tax-deductible contributions to retirement funds are capped at 27.5% of taxable income or R350 000 yearly, whichever is lower. When you retire, you’ll receive two thirds of the retirement interest of your pension, pension preservation or RA, in a regular pension or annuity amount.

If the annuity income exceeds the tax threshold, you’re liable for tax on that amount. The tax thresholds for March 1, 2018 to February 28, 2019 are:

Under 65s don’t pay tax on the first R78 150 earned yearly.

65s-75s don’t pay tax on the first R121 000.

75s+ don’t pay tax on the first R135 300.

The remaining one third of the retirement interest paid to you on retirement is subject to a lump sum tax.

While retirement funds earn investment returns (from when you take out the investment to when you retire), you don’t pay income tax, capital gains tax (CGT) or dividends withholding tax (DWT) on these investment returns.

Endowment policies

You’ll receive the benefit on maturity as an after-tax amount, because during the investment term, the life assurance company pays tax in the portfolio at a 30% rate for interest, 30% for rental income (from property investments) and CGT at a 12% rate.

Thus, effectively, an endowment policy makes the most sense if your marginal tax rate is over 31% – if you’ve already used your annual tax-free interest exemption of R23 800 for taxpayers under 65 and R34 500 for taxpayers over 65.

Also, note your R40 000/year CGT rebate. If you nominate a beneficiary, you won’t have to pay executors’ fees on the endowment policy proceeds.

Unit trust funds

When you invest in a unit trust fund, you’re liable for tax on the income generated from the investment at your marginal tax rate. Also consider DWT and CGT.

If you dispose of underlying shares in the investment, or transfer your investment between different funds, you may also be liable for CGT. A net capital gain for the current year of assessment is multiplied by the inclusion rate applicable for you to get the taxable capital gain.

E.g. if you invest R500 000 in a unit trust fund over five years there’s:

Exemption on the first R23 800 interest earned.

20% withholding tax on dividends earned – usually paid by the investment company on your behalf.

When you sell out of the unit trust fund, you won’t need to pay CGT on the first R40 000 worth of gains. – Discovery Invest

This article shouldn’t be taken as financial advice.