When your client makes an investment, one of the first questions they may ask you, is "what is the most tax-efficient choice for my investment?"
Their ultimate investment choice will take into account various factors such as their reason for investing, the timeline of the investment and the client's risk profile. In this article, we take a look at a few investment vehicles and highlight the tax implications of each investment for your client:
Retirement funds – retirement annuities, pension funds and provident funds:
Tax-deductible contributions to retirement funds - are capped at 27.5% of taxable income or a rand amount of R350 000 per year, whichever is the lower. When an investor retires, they will receive two thirds of the retirement interest in respect of pension, pension preservation or their retirement annuity in the form of a regular pension or annuity amount. If the income from the annuity exceeds the tax threshold, the investor is liable for tax on this.
*The tax thresholds for the period from 1 March 2017 to 28 February 2018 are as follows:
- Clients under 65 – don't pay tax on the first R75 750 earned per year.
- Clients between the ages of 65 and 75 – don't pay tax on the first R117 300 earned per year.
- Clients that are 75 and older – don't pay tax on the first R131 150 earned per year.
The remaining one third of the retirement interest that is paid out to the investor on retirement is subject to a lump sum tax as follows:
Taxable income (R)
Rate of tax (R)
|R0 – R500 000||0% of taxable income|
|R500 001 - R700 000||18% of taxable income above R500 000|
|R700 001 – R1 050 000||R36 000 + 27% of taxable income above R700 000|
|R1 050 001 and above||R130 500 + 36% of taxable income above R1 050 000|
Source: South African Revenue Services (SARS), 2018 tax year (1 March 2017 - 28 February 2018)
It is important to remind clients that while retirement funds are earning investment returns i.e. in the period between taking out the investment and retirement date, they will not pay income tax, capital gains tax or dividends withholding tax on any investment returns.
*Note that these limits will change when the Budget Speech takes place on Wednesday, 21 February.
A client who takes out an endowment policy receives the benefit on maturity as an after-tax amount. This is because during the term of the investment, the life assurance company pays tax in the portfolio at a rate of 30% for interest, 30% for all rental income (from property investments) and capital gains tax at a rate of 12%. This effectively means that an endowment policy will make the most sense for clients whose marginal tax rate is higher than 31% - provided that they have already used their annual tax-free interest exemption of R23 800 for taxpayers under the age of 65 and R34 500 for taxpayers over the age of 65. Investors also need to take into account their CGT rebate of R40 000 a year. Finally, one of the more attractive benefits of an endowment policy is that if the client chooses to nominate a beneficiary, executors' fees are not payable on the proceeds of the endowment policy.
Unit trust funds
When your client invests in a unit trust fund, they will be liable for tax on the income generated from the investment at their marginal rate of tax. Other taxes that need to be taken into account include dividend withholding tax and capital gains tax (CGT). If the client disposes of underlying shares in the investment, or even if they transfer their investment between different funds, they may also be liable for CGT. A net capital gain for the current year of assessment is multiplied by the inclusion rate applicable to the person to arrive at the taxable capital gain.
For example, let's say your client invests R500 000 in a unit trust fund over a five year period, the tax implications are as follows:
- There is an exemption on the first R23 800 of interest earned.
- There is a withholding tax of 20% on dividends earned – this is usually paid by the investment company on behalf of the client.
When the client does sell out of the unit trust fund, they do not pay any capital gains tax (CGT) on the first R40 000 worth of gains (the difference between the amount they sell for and the original investment value of R500 000). The inclusion rate for individuals for 2017/2018 is 40%.
This article is meant for information purposes only and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser.
Discovery Life Investment Services Pty (Ltd): Registration number 2007/005969/07, branded as Discovery Invest, is an authorised financial services provider