Taxes, lets all sigh together. No sane person enjoys paying their taxes, we always think the rates are too high and mismanaged . No one likes taxes, nor do I , but I am a strong believer that you need to have a good understanding of the tax system in your country, and how to manoeuvre that system as effectively as possible to keep your taxes as low as possible. For example the South African Income Tax Act, offers a lot of initiatives, that offers deductions for taxpayers. You will not be able to benefit from these deductions if you are not aware of them. So this article is pertaining to the taxes that relate to your investment portfolio , this is a guide and overview of tax implications over your investment portfolio. Please note that I am not a tax expert and you should seek further consultation of a tax expert to get an experts advise and professional opinion.
Tax- free investing accounts
These were introduced by SARs in 2015 to incentivise households to save and invest money. The way this account is set-up is that you do not have to pay an income tax, dividends tax or capital gains on the returns on the investments made in the account. You can only contribute R33 000 per year to that account. Note that if this maximum is not contributed in a year the remaining does not roll out to the next year, thus for example Taxpayer X invests R27 000 in year 1. The unused portion of R6000 is NOT rolled-over to year 2. In year 2, the taxpayer can only invest R33 000 as per the annual limits. The limit of R33 000 applies even if you have more than one tax free investing account. You are able to have more than one tax free investing account, but the money that is invested in each tax- free investing account cannot exceed the total amount of R33 000.
The taxpayer cannot invest more than R500 000 in their TFSA account in their lifetime. If this total amount is exceeded they are subject to a penalty. The penalty is they have to pay a taxable rate of 40% of the amount that has been exceeded over the limits. For Example: Taxpayer X invests R35 000 – which exceeds the annual limit by R2000, 40% of R2000 = R 800 which must be paid to SARS. This penalty is added to the normal tax payable on assessment.
A person can have more than one tax free investment, however, you are still limited to the annual limits per tax year. This means you can invest for example R11 000 in TSFA with bank A , R11 000 in TSFA with bank B and R11 000 in TSFA with bank C.
Note that when returns on investment are added to the capital contributed, the balance may exceed both the annual and/or lifetime limit. The capitalisation of these returns within the account does not affect the annual or lifetime limit. E.g. If you invest R33 000 for the year and receive a return of investment of R5 000, the total amount in the account will be R38 000. The following year, you will still be able to invest your full R33 000 for year. However, where a person withdraws the returns and reinvests the same amount, that amount is regarded as a new contribution and impacts on both the annual and lifetime limits. Note that any withdrawals made cannot be replaced, be it returns or capital.
The information pertaining to tax free investments was sources directly from SARS and the link can be found here (http://www.sars.gov.za/TaxTypes/PIT/Pages/Tax%20Free%20Investments.aspx)
Therefore it goes with out saying there are benefits to a tax free investment account, as well as limitations pertaining how money you can contribute towards these accounts.So what happens when you do not comply with the requirements for a tax free saving account, what are the tax implications?
Tax implications on non-free tax investment accounts
The first thing you need to know is that there is an exemption on interest earned for all tax payers. This amount may change depending on the year, and you should have a look at the table published by SARS showing the rates and respective amounts. At the time of this article the amounts are as follows , a natural person under the age of 65 is able to claim a n exemption of R 23 800 , a natural person over the age of 65 is able to claim an exemption of R34 500. This means that of the total interest that is claimed these respective amounts are exempt from being subject to tax. These amounts are pertaining to interest that is earned from a South African source, when the interest is earned from a foreign source the exemptions that are applicable are much less.
Dividends are taxed at a flat rate of 20% (this may have changed and therefore I suggest you confirm with the official rates published by SARs). The tax implications for foreign dividends are calculated against different rates and conditions, that can be found on the SARs website.
Capital gains from disposed (sold) assets
Capital gains are subject to a much lower rate of tax, in comparison to income tax. The matter of capital gains is actually more complex then presented in this article. A taxpayer has to prove on a balance of probabilities that the money they have earned is not of a revenue nature and is of a capital nature , in order to be able to benefit from the lower tax rates offered to capital gains.
Capital gains are taxed at fixed rates, for individuals and special trust it is taxed at 18% ,for companies its 22.4% and for other trust it is 36%.
Hopefully this overview will give you enough information to have a general understanding of the tax implications of on your investments.