Ideas for saving tax on your investments

July 2020

Helfin Financial Services

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 you retire, you’ll receive two thirds of the retirement interest of your pension, pension preservation or retirement annuity, in the form of a regular pension or annuity amount.

If the income from the annuity exceeds the tax threshold, you’re then liable for tax on that amount. The tax thresholds for the period from 1 March 2018 to 28 February 2019 are as follows:

If you are under 65, you don’t pay tax on the first R 78 150 earned per year.

If you are between the ages of 65 and 75, you don’t pay tax on the first R 121 000 earned per year.

If you are 75 and older, you don’t pay tax on the first R 135 300 earned per year.

Endowment policies

  • If you take out an endowment policy, you’ll receive 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 (CGT) at a rate of 12%.
  • This effectively means that an endowment policy makes the most sense if your marginal tax rate is higher than 31% – provided that you’ve already used your 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.
  • You also need to take into account your CGT rebate of R40 000 a year. Finally, one of the more attractive benefits of an endowment policy is that if you choose to nominate a beneficiary, you won’t have to pay executors’ fees on the proceeds of the endowment policy.

Tax-free savings accounts (TFSAs)

These accounts were introduced by Sars in March 2015. Contributions to TFSAs are not deductible for income tax purposes. However use of these vehicles ensures that investments are exempt from income tax, CGT and dividends tax. A wide range of underlying investment types are possible when using the TSFA, including fixed deposits, unit trusts, retail savings bonds, certain endowment policies, linked investment products and exchange traded funds (ETFs). As of 2018, each taxpayer is allowed to invest R 36 000 a year, up to a lifetime contribution of R 500 000. Investments into TFSAs can also be made on behalf of minor children or grandchildren.

Managing exposure to interest-generating investments

Taxpayers who are below 65 years of age are permitted to earn R23 800 in interest per year without paying any tax on it, while over-65s can earn R34 500. This amount can be increased if investments that attract interest are spread to a spouse. Note that all interest received from a foreign source by a South African resident will be fully taxed. The interest exemptions described above only apply to local interest.

Rand-denominated versus foreign currency-denominated investments and tax on interest, dividends and CGT

  • There are two ways South Africans can invest offshore. You can either invest in a rand-denominated offshore unit trust offered by a local manager, or invest directly in foreign currency with a foreign manager or through an offshore platform.
  • If you invest in a rand-denominated foreign fund, you pay tax on interest and dividends. Foreign dividends are included in your taxable income and are taxed at an effective rate of 20%. The full value of foreign interest is included in your taxable income.
  • Both investment routes require SA residents to pay tax on capital gains on the investments when they are sold. However, if you invest in rands, you pay tax on all gains on your original rand investment, regardless of whether those gains are from capital growth or currency movement. If you invest in a foreign currency-denominated fund, you could save on CGT as you don’t pay tax on currency movement while you are invested.

Reducing your taxable income by taking advantage of rebates

  • Medical scheme fees tax credits reduce the normal tax you pay if you are a member of a medical scheme. The credit is non-refundable and any portion that is not allowed in the current year can’t be carried over to the next year of assessment.   
  • A wide range of taxpayers are eligible for additional medical expenses tax credits. These are rebates calculated against qualifying ‘out of pocket’ medical expenses paid by you, the taxpayer, either for yourself or for any dependant. Over 65s and disabled dependants are eligible for a rebate of 33.3% of the qualifying medical expenses paid on an out-of-pocket basis. Taxpayers who are younger than 65 are also eligible for medical expense-related rebates; they can claim for 25% of the amount by which the sum of the amounts paid for qualifying medical expenses, (either in or outside South Africa) exceed 7.5% of their taxable income.
  • As in many other countries, South Africa allows taxpayers tax-free donations between spouses and donations to approved public benefit organisations. Taxpayers are also permitted to donate up to R 100 000 a year to other individuals.
  • One of the main challenges to the growth of small- and medium-sized businesses and junior mining exploration is access to equity finance. In 2009 National Treasury, via Sars introduced Section 12J rebates, tax incentives for investors in these companies on condition that they invest through a qualifying, approved venture capital company (VCC). The VCC regime is subject to a 12-year sunset clause, recently extended to June 2021.
  • Due to the housing shortage in South Africa, National Treasury, through Sars, has introduced a number of incentives to encourage taxpayers to invest in residential property. Section 13 Sex of the Income Tax Act allows for a tax deduction of 5% of the cost of the building, improvement or acquisition of any new and unused residential units, if the taxpayer owns at least five units situated in South Africa and uses them solely for trade purposes.