TAX CONSIDERATIONS FOR INDIVIDUALS’ INVESTMENTS

TAX CONSIDERATIONS FOR INDIVIDUALS’ INVESTMENTS

The impact of tax on investment returns has been a hot topic in South Africa lately.  Tax affects individual investors differently for different types of investment vehicles, and the most tax efficient portfolio will differ from one investor to the next.  To make the most of investment returns, tax considerations should be taken into account.  Although there are various factors to consider when investing (such as liquidity), in this article we focus mainly on the tax considerations for high net worth individuals.

Retirement funds

Contributions:  Contributions of up to 27.5% of the higher of annual remuneration or taxable income per year into retirement annuities, pension funds and provident funds are tax deductible, with the annual deduction  being capped at R350 000.  This means that the money invested in these retirement vehicles reduces the tax paid in the current year – so the benefit is immediate.

Tax on returns:  Tax on these types of investment returns is deferred to when withdrawals are made at retirement age (assuming that there are no withdrawals made before retirement), which means investors don’t pay tax on any returns earned while the money remains invested in a retirement fund.  On retirement from a pension fund or a retirement annuity fund, one-third of the investment can be taken as a lump sum and the rest must be taken in the form of an annuity (let’s assume a living annuity).  The first R500 000 of the lump sum withdrawn (in aggregate) is tax free while the rest is taxed according to specified retirement fund lump sum benefit tax rates.  Income received from the living annuity (including capital) falls into gross income and is taxed according to income tax rates.  For residents who earned income while working abroad, amounts received by or accrued to them under the social security system of the other country, or lump sums, pensions or annuities received by or accrued to them in relation to past employment outside of South Africa, are exempt from tax.

Note that the annuitisation requirement only applies to retirement annuities and pension funds, but it is anticipated that annuitisation may also become a requirement for provident funds.

Liquidity:  The purpose of investing in retirement funds is to save for retirement, so liquidity is very limited.

Tax-free savings accounts (TFSA)

Contributions:  Contributions are made from after-tax earnings and are limited.  Up to R30 000 can be invested into a TFSA per tax year, with a lifetime limit of R500 000.  There is a wide range of investment products available as TFSAs.

Tax on returns:  All returns earned on the investment are tax-free, and so are withdrawals.  However, investors who contribute more than the allowable annual or lifetime contribution will be liable for income tax of 40% of the amount over the contribution limit.

Liquidity:  Investors should have access to their money within seven days.  While it’s good to know money in a TFSA is readily available, ideally these investments should not be made with the intention to withdraw in the short term as the annual contribution limit does not take withdrawals into account.

Unit trusts

Contributions:  Contributions are made from after-tax earnings and there are no limits on how much can be invested.

Tax on returns:  Returns earned in unit trust investments are taxable as they are earned (see the infographic below for the various tax rates on different types of returns).  However, there is an annual interest exemption and an annual capital gain exclusion to be used before being taxed on interest and capital gains. Although unit trusts don’t generally have a tax efficient focus, if tax efficiency is a requirement for the investor it is important to look at fund returns on an after-tax basis as some unit trusts are more tax efficient than others.  Though the evaluation of investments on a pre-tax basis is the norm, there are tax managed unit trusts available in South Africa (these funds have after-tax benchmarks and offer tax efficient returns).

Liquidity:  Generally, money invested can be accessed within one to three working days.

The infographic below shows some of the different tax considerations and the impact tax can have in rand terms.

TAX CONSIDERATIONS FOR INDIVIDUALS’ INVESTMENTS

Taking a close look at the tax implications of investment choices could really make a difference to investors’ money in the long term.  There are of course other factors to consider that can also make a difference to returns, such as fees and performance.  If you are an investor and would like more information on the options available to you, we recommend you speak to a financial advisor.

Ian Groenewald

Ian Groenewald

 

 

 

 

 

 

Disclaimer

The information in this document is proprietary to Ora Fund Managers (Pty) Ltd (Ora) and is not to be reproduced, distributed, published or used for any purpose other than the evaluation of any proposal contained in the document, except with the written permission of a representative of Ora.  The information contained in this document (together with any opinions expressed or further information provided in connection with this document) is of a general nature and provided for illustrative purposes. It does not address the circumstances of any particular person or entity and it is not a recommendation or advice in relation to any transaction or investment.  In making this information available, we are not purporting to act in any way as an advisor or in a fiduciary capacity. No one should rely on any of this information without appropriate advice from an independent financial adviser, based on a thorough investigation of the investor’s specific circumstances.  While we have taken care to ensure that the information is accurate and not misleading, Ora makes no representations or warranties of any kind with respect to its accuracy, completeness or correctness. The information is provided on the clear understanding that Ora will not be held liable or responsible for any loss or damages that may be suffered by any person or entity as a result of that party placing reliance on or failing to act on any of the information provided.

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