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As the tax year is nearing an end (28 Feb), now is a good time to review your investment tax structures to ensure that you have taken advantage of all tax savings and that you are gaining the maximum benefit from the most tax- efficient financial plan.
Gain immediate tax savings before the end of February
Use your CGT exemption – Each year, the first R40 000 of net capital gains is excluded from capital gains tax for individuals and special trusts.
Top up your Retirement Annuity – If you are contributing towards a Retirement Annuity, maximise your tax-deductible contributions of up to 27.5% of the higher of taxable income or remuneration with a maximum annual deduction of R350 000.
Maximise your Tax-Free Investment – The interest, capital gains and dividends you earn in a tax-free investment are tax-free. You can contribute a maximum of R36 000 per tax year, up to R500 000 over your lifetime.
Review your savings tax structure
Tax efficiency will add significant long-term value to achieving your financial goals.
There are many different investment products to choose from that all have different savings benefits: unit trusts, endowments, retirement funds (pension and provident funds, retirement annuities), living and life annuities, tax-free saving accounts and offshore investments.
When selecting one of these products, the following need consideration:
- Your age
- Your appetite and tolerance for risk
- Your current and future needs
- Liquidity: The amount of access you need to your investments
- The tax efficiency of your chosen product
Main tax benefits per product:
Retirement funds
You pay no tax on interest, dividends or capital gains while invested in these funds.
Contributions up to 27.5% of your annual income or a maximum of R350 000 per year are tax deductible.
There are tight restrictions to withdrawing and only accessible when retiring or resigning from funds.
Endowments
Income taxes are a flat 30% on interest earned, 12% on capital gains and 20% on dividends.
They offer better savings for high-income earners but have restrictions on withdrawals in the first five years.
Tax-free savings
You pay no tax on interest, dividends, or capital gains.
You can invest a maximum of R36000 per year or R500000 in a lifetime.
Unit Trusts
Interest, capital gains and foreign dividends are taxed at your marginal tax rate. Local dividends have a 20% withholding tax.
This is the most flexible investment product with minimal restrictions.
Offshore Investing
You can take R1m offshore every calendar year without getting SARS clearance.
There are many different types of benefits and restrictions per country.
For South Africans, the best option is investing in an ‘international wrapper’ which effectively reduces taxes to 12% on capital gains when withdrawing and avoids taxes on Rand movements. In addition, the estate planning benefits are very efficient and simple.
Get help from a qualified and experienced financial planner
Tax benefits are one piece of the puzzle and different products should not be looked at in isolation. Each offers distinct benefits and should be considered with different combinations to achieve the best long-term benefits.
An independent financial planner (such as Investonline) will assist you to:
- Build your own personalised, holistic financial plan that considers your goals, retirement, estate planning, liquidity constraints, offshore structuring, and tax-efficiency,
- Ensure you invest in the right products or a combination thereof,
- Establish your personal risk profile and match it with the appropriate investment strategy,
- Incorporate the right asset allocation and offshore investments with the necessary diversification,
- Review your investment portfolio regularly and recommend adjustments, when necessary,
- Have regular meeting reviews to ensure your plan remains on track.