Hacking your taxes with ETFs.


In South Africa a lot of our earnings are being diminished by the exceptional high and burdensome taxes that we are legally obliged to pay.A failure to pay taxes can result in a criminal sanction.Taxes will always remain a controversial matter because they are intrusive invasion of our personal finances. There are however some instruments that the governments has provisioned for as mechanisms to help people mitigate the costs of taxes, and the Tax Free Saving Account (TFSA) is one of them.

What is a tax free saving account?

The name is a bit confusing , as the implication of the phrase “saving account” implies that this is similar to other saving accounts , where you earn an interest from the money you save in the account and the only additional bonus is that this money is free from tax liabilities. This is not the case , the way a tax free saving account works, is that it can be only utilised through investment vehicles. From the name “saving account” one does not immediately associate this account with investments and the investing process. However, the very function of this account is to serve as an investment account that protects your investments from tax liabilities. If you wish to learn more about tax free saving accounts you can have a look at the following links inserted below:

A tax free saving account sounds very exciting but it is important to take note of its limitations of this account.

The limitations of TFSA

There are certain assets which are precluded from being included in a tax free saving account. Firstly any assets that exceed the monetary limitations that are applicable to the tax free saving account are excluded from the account. Also any assets that charge a performance fee are excluded from the tax free saving account. To further add to this list , you cannot include REITs, derivatives , commodity ETFs , ETNs, currency ETFs and individuals shares in your tax free saving account. This is with the objective of promoting diversification of investors portfolio. For some of this above mentioned assets there are ways to get around them, for example if you want exposure to REITs you can invest in an REIT ETF or a Property ETF.Β 

The products which are often allocated into tax free saving account are ETFs and Unit Trusts. However, with that said it is more favourable to pair your tax free saving account withe ETFs. This is for two main reasons. The first reason is that ETFs are more cost effective than unit trusts and therefore for this reason they often perform better than unit trusts. Another primary benefit of ETFs is that they are traded live on the financial markets and therefore unlike Unit Trusts, they are easier to buy and sell. If you wish to understand the difference between ETFs and Unit Trusts , you can use the following link: . Also this information is readily summarised and available on our chat bot and mobile application.

The benefit of a tax free saving account demonstrated in numbers.

The tax free saving account excludes all dividends , interest and capital gains earned from your investments from being taxed. Therefore, the money that you generate through this account is 100% protected from SARs.These financial benefits are best experienced by long term investors, and for the purpose of this article long term can be regarded as a period spanning between 10 to 20 years. This has much to do with the fact that the effectiveness of a tax free saving account is to harness the benefits that you get from compounding your investment over a long period of time.

When you invest outside of our tax free saving account your investments are subject to the following taxes:

  1. Dividends tax which is a taxed at the following fixed rates subject to if it is an International or domestic investment : 
    1. Domestic dividends are taxed at the flat rate of 20%
    2. Foreign dividends are taxed a maximum effective rate of 20%
  2. Interest is subject to the following fixed tax 
    1. A flat rate of 15% is taxable on interest earned from South African sources to non – South African residents.
  3. Capital gains which are generated from your investments will have the following implications: 
    1. Capital gains are taxed at a flat rate of 18%.

The benefits of a tax free saving account are well demonstrated when you explore some examples , so lets have a look at the following examples.

X invests R12 000 a year for the next 10 years. He does this without utilising a tax free saving account. His investments are able to produce an average return of 8% per annum of which 3% is on dividends. The gross amount that X is able to generate over the 10 years is :

R207 190.30.

As X did not use a tax free saving account, his investments are subject to the following taxes:

He has to pay a flat tax on the dividends earned which in this example will be 20% * (3% * 207 190.30) which amounts to R 1 243.14. In addition to this if he sells these assets which he will have to pay tax on the capital gains which will be 18% * (207 190.30 – 120 000) and this amounts to R 15 696.33.

Therefore the tax X will be liable for on his investment portfolio will amount to R 16 938.47 . Therefore, this will subsequently diminish the value of his investment portfolio from R207 190.30 to R190 251.83. The tax deduction could have been avoided if he had utilised the tax free saving account. The benefits of a TFSA speak for themselves as an effective instrument to optimise on the returns from your investment portfolio. Hopefully this article has provided you with the necessary information to invest wisely through a tax free saving account. If you have any further questions please leave them in the comment section and I will reply as so as possible as best as I can.


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