You can empower yourself greatly by understanding the tax on your savings. It is not only to your benefit when submitting your annual tax return, but more importantly, this knowledge can help you to save better, says Mariska Redelinghuys, Retail Legal Advisor at the Sygnia Group.
You can empower yourself greatly by understanding the tax on your savings. It is not only to your benefit when submitting your annual tax return, but more importantly, this knowledge can help you to save better, says Mariska Redelinghuys, Retail Legal Advisor at the Sygnia Group.
“Saving keeps the debt-wolf from howling at your door, but we as South Africans are notoriously bad at saving. Statistics show that the household saving rate increased to -0.80 percent in the first quarter of 2016 from -2.40 percent in the fourth quarter of 2015*, which is dreadfully little.”
In fact, personal savings in South Africa averaged only 4.98 percent from 1960 until 2016.
Saving is the corner stone of your financial well-being and every little bit helps, whether it is part of a long-term goal such as retirement or saving to go on holiday without incurring a load of debt.
If you can pay for an emergency without maxing out your credit card or using an overdraft, you save yourself from years of repayments and unnecessary interest costs.
Redelinghuys says one way to get the most out of your savings is by understanding the tax on your investments. This will help you to structure your savings tax efficiently, which basically boils down to minimising any tax payable and making the most of any tax benefits.
Different tax structures apply to different investments, for instance Capital Gains Tax (CGT) can come into play when you dispose of shares in your unit trust. Furthermore, your personal tax rate can also influence the amount of tax you pay.
Keep in mind that if you are younger than 65, you don’t pay tax on the first R23 800 of interest you earn on your savings. This threshold increases to R34 500 when you are older than 65.
Redelinghuys explains different saving structures and their tax implications:
Tax-free savings account
The income on this investment is tax exempt. No dividend tax or CGT is paid during the lifetime or on disposal of the investment. You will receive a tax certificate from the financial services provider, confirming that it is a tax-free investment, to submit along with your annual tax returns.
Just be careful, don’t breach the annual investment limit of R30 000 or lifetime limit of R500 000, because a tax of 40% on the excess capital contributed applies if you exceed it.
Retirement annuities
As with the tax-free savings account, no tax is paid during the lifetime of the investment on the capital growth and income, nor CGT on the disposal thereof.
However, tax does apply to lump sums taken as a withdrawal or at retirement. Tax will be calculated on the aggregated lump sum according to the applicable tax table in terms of the 2nd Schedule of the Income Tax act. Currently the first R500 000 of your retirement benefit will be taxed at 0%, but only the first R25 000 of your withdrawal benefit will not attract tax.
The good news is that RA contributions are tax deductible up to an annual limit of 27,5% of the greater of your remuneration or taxable income, capped at R350 000 per annum.
Unit trusts
You will be liable for tax on the income generated from your investment at your marginal rate. If you dispose of underlying shares in the investment, or even if you transfer your investments between different funds, you may also be liable for CGT.
In time for your tax return you will receive a certificate setting out the income you received on your investment, e.g. the interest you received on the cash component or dividends you received on the equity component.
The latter is relevant because it will attract dividend tax of 15%. Dividend tax is a withholding tax and gets paid directly to the South African Revenue Service by either the company distributing the dividend or, where relevant, certain other withholding agents.
Endowments
They usually offer greater tax efficiency for higher income earners. This is because the income and growth on your investment is not taxed at your marginal tax rate. Instead, income is taxed at a rate of 30% within the fund and CGT at a rate of 12%.
Cash in a bank savings account
Here you have to keep in mind that you will pay tax on any interest earned above R23 800 if you are younger than 65, and above R34 500 when you are older than 65.
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**MARISKA REDELINGHUYS
RETAIL LEGAL ADVISOR, SYGNIA GROUP**
Mariska is an admitted attorney, notary and conveyancer. Prior to joining Sygnia, Mariska worked as Fiduciary Specialist with Absa Trust.
SYGNIA GROUP
The Sygnia Group comprises six operating companies; Sygnia Life, a life assurance company, Sygnia Asset Management, a licensed asset management company, Sygnia Collective Investments, a unit trust company, Sygnia Financial Services, a LISP, Sygnia Securities, an execution-only stockbroker and Sygnia Systems, a financial software development company.