Be tax efficient

ENHANCE RETURNS: TAKE ADVANTAGE OF EXEMPTIONS AND REBATES

To win in the long term, be aware of tax rules that guide investments and take advantage of suitable tax savings.

PThe South African Revenue Service offers savers tax deductions on retirement fund contributions. Retirement fund investments are also exempt from income tax, capital gains tax (CGT), and dividends tax on investment returns.

Taxpayers can reduce their income tax by contributing up to 27.5%, or higher, of gross remuneration or taxable income – R350 000 annual limit – to a retirement fund. Your pension fund isn’t considered for estate duty.

Post-tax savings

These vehicles include those exempt from CGT and/or tax on interest or dividends.

Alternatively, they could be taxed at a lower rate.

Tax-free savings accounts: Investments are exempt from income tax, CGT and dividends tax. Taxpayers can invest R33 000 a year and R500 000 in a lifetime;

Unit trusts: If equity investments are housed within unit trusts, no trading tax applies and CGT is only payable when units are sold;

Endowments: The higher your tax rate is above 30%, the more you benefit by investing in an endowment. They are taxed in terms of the “five funds tax” rule and not subject to executor’s fees when paid out to nominated beneficiaries; and

Living annuities (LA): LA assets are not taxed while invested. Income drawn is subject to income tax, but over-65 annuitants benefit from preferential tax treatment. When you die, there are no executor’s fees on the beneficiaries nominated; it’s outside your estate for estate duty purposes.

Interest-generating investments

Taxpayers below 65 can earn R23 800 in (local) interest per year without paying tax on it; over-65s can earn R34 500. This can be increased if investments attracting interest are spread to a spouse.

Offshore investments

South Africans can invest in a rand-denominated offshore unit trust offered by a local manager, or invest directly in foreign currency with a foreign manager or through an offshore platform.

If you invest in a rand-denominated foreign fund, you pay tax on interest and dividends.

Foreign dividends are included in your taxable income and taxed at a 20% effective rate. The full value of foreign interest is included in your taxable income.

Both investment routes require South African residents to pay CGT on the investments when they are sold. If you invest in rands, you pay tax on all gains on your original rand investment. If you invest in a foreign currency-denominated fund, you could save on CGT as you don’t pay tax on currency movement while you are invested.

Some rebates include:

Medical scheme fees tax credits reduce the normal tax paid for medical scheme members. Credit is nonrefundable and any portion not allowed in the current year can’t be carried over;

Additional medical expenses tax credits are rebates calculated against qualifying “out of pocket” medical expenses paid by taxpayers for themselves or a dependant. Over 65s and disabled dependants are eligible for a 33.3% rebate. Under 65s can claim for 25% of the amount by which the sum of the amounts paid for qualifying medical expenses exceeds 7.5% of their taxable income;

South Africa allows tax-free donations between spouses and donations to approved public benefit organisations. Taxpayers can also donate up to R100 000 a year to other individuals;

Section 12J rebates are tax incentives for investors in small and medium-sized enterprises, and junior mining exploration companies, if they invest through a qualifying, approved venture capital company; and

Section 13 Sex of the Income Tax Act allows for a 5% tax deduction of the cost of the building, improvement or acquisition of new and unused residential units, if the taxpayer owns at least five units in South Africa, used solely for trade purposes.

Trevor Lee is a Rosebank Wealth Group financial planner