It’s important to understand the tax benefits within the plethora of investment products available so that you can make an informed decision. It’s worthwhile considering speaking to an independent financial adviser (IFA) who can provide you with expert guidance about the product(s) that may best suit your situation.
Tax has a substantial influence on your investment return
Products in which you can choose to invest include basic unit trusts, tax-free investments, retirement annuities (RAs) and endowments. You should consider a variety of factors, including:
- Your age.
- How much risk are you willing to take?
- Your current and future financial requirements.
- Investment time horizon; this essentially means how long you intend to remain invested for. E.g. Should you want immediate access, it’s worth considering an investment product such as a money market account. The downside is that you will more than likely accumulate less return on your investment. If you are interested in earning a higher return, are comfortable with market fluctuation and can leave the funds in the account for an approximate minimum of five years, think about investing in an equity fund.
- Tax efficiency.
Tax definitions
Income tax
Income tax can be defined as the standard tax that you pay on your taxable income. Investment income, such as interest and foreign dividends, also incurs income tax.
It should be understood that you are responsible for the tax on income generated at your marginal rate. Your marginal tax rate is the percentage of tax applied to your tax bracket in which you qualify. You should declare this income in your tax return to the South African Revenue Service (SARS).
Capital gains tax
What is capital gains tax?
Capital gains tax (CGT) is part of income tax. It is initiated when you make a profit from selling something you own, e.g. an asset such as a property. CGT is calculated on the profit you make, not on the amount for which the asset has been sold.
CGT applies to individuals, trusts and companies and must be paid to SARS. If you are a South African tax resident, you are typically responsible for CGT on assets located in, and outside, South Africa. You should disclose any capital gain — or loss — you may have experienced in your tax return.
Lump sum tax
Should you decide to take a cash lump sum from your retirement fund when you retire, or as a pre-retirement withdrawal, it is generally taxed according to official lump sum tax tables prescribed by SARS. The tax amount is calculated cumulatively and also takes all previous taxable lump sums received from a retirement fund — or an employer — into account. The first R25,000 of a pre-retirement lump sum and the first R500,000 of a retirement lump sum are tax-free. This is a once-off tax break per individual in his/her lifetime.
Dividend withholding tax
A dividend can be defined as any payment by a company to an investor regarding a share (or shares) they hold in that company. A dividend withholding tax levy of 20% can apply to any dividend paid by a resident company or foreign company whose shares are listed on the JSE.
The different types of tax in investment management can be challenging to wrap your head around. As mentioned earlier, should you require any assistance, it’s recommended that you speak to an IFA.
