The dreaded three-letter word that everyone loathes. Tax. Tax is money people pay to the government in exchange for public services. In South Africa, the general feeling is that we are paying way too much for the services we get.
Over the past decade, there have been several changes to tax law, mainly increased rates passed on to the taxpayer. It is worth noting that most of these changes impacted wealthy individuals. We list some of the biggest changes below:
In the latest statistics from SARS, we noted that 67% of personal income tax collected came from 16% of taxpayers that earn more than R500 000 per year. The wealth taxes listed above exhausted the options the revenue service had for taxing the wealthy and potentially led to the increased VAT for everyone in 2019.
Tax revenue has grown year on year but at a declining rate. The graph below illustrates how tax revenue growth declined over the last 10 years. Tax compliance within South Africa has been on the decline and SARS has identified this as a major concern. With a new commissioner at SARS, it will be interesting to see how they tackle this in the coming years.
Source: Tax Statistics 2019, National Treasury
In the past aggressive tax planning could be done using structures such as trusts and retirement annuities. However, SARS has clamped down on these structures and people abusing certain tax provisions. These days it’s much harder to find a worthwhile tax break, but there are still a few great tax planning tools you can use.
Contributions to a pension fund, provident fund or retirement annuity are tax-deductible! You can contribute up to R350 000 per annum (or 27.5% of your salary). The best way to save for your retirement would be through these structures.
Endowments offer significant tax relief for high-income earners
If you have a long-term view and fall in the top income tax bracket using an endowment to house investments can significantly reduce tax and complexity. Within the structure, you are taxed at 30% on income and 12% on capital gains. It’s taxed within the structure therefore all withdrawals will be after tax.
Global endowments offer similar advantages for funds externalised. We recommend using a global endowment rather than buying feeder funds on local platforms. If you buy Rand denominated global (feeder) funds you are taxed on both capital growth and Rand depreciation. In a global endowment, the tax is much lower, and you are taxed only on capital growth.
Riskier assets are more tax-efficient
Having a large amount saved in cash is very tax intensive. Any amount over R340 000 will attract tax at your marginal rate. Investing in equities attracts capital gains tax or dividends tax and is much more efficient from a tax standpoint. If you want to balance your risk rather increase your cash and bond holdings within your retirement assets where there are no taxes.
12J structures are an interesting option for high net worth families.
Investors with high tax bills due to bonuses, share incentives or the selling of a company can explore the option of a section 12J investment. Your contribution is tax-deductible in year one and taxed as a capital gain later. You can save as much as 27% in tax. You will, however, be locked into the investment for 5 years and exposed to the South African economy.
Tax-Free Savings accounts ideal as an education fund for young children
For younger investors, a tax-free savings account is an option. Even though contributions are capped at R33 000 per year and R500 000 over your lifetime, you can save a great deal of tax if you invest for the long-term. This product is perfect for longer-term goals such as children’s tertiary studies that are still a long way away.
As investors, we often try to limit the taxes paid and look for products and opportunities that are less tax intensive. Although this is a major part of investing, it is not the only thing to consider. A lot of these options are limiting in what you can invest in. Choosing the correct investment for your needs should be the primary driver when making these decisions. Choosing the correct tax structure should be secondary.
Steve Forbes once said, “The politicians say we can’t afford a tax cut, maybe we can’t afford the politicians.”
Until such time, we should use what tax breaks are available.