You Have Until End-Feb to Make Tax Efficient Investment Decisions: Here’s a Guide How to

You can legitimately save some tax either by reducing your tax bill, or negating some taxable income altogether.

Stephen Katzenellenbogen CFP®

Stephen Katzenellenbogen CFP®

Senior Executive and Private Wealth Manager

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You Have Until End-Feb to Make Tax Efficient Investment Decisions: Here’s a Guide How to

The end of the 2020/2021 tax year is upon us, leaving a few weeks to decide whether any of these investments are suitable for you. 

Tax Free Savings Account (TFSA)

The TFSA provides tax benefits so that all growth in savings, no matter the source – income, capital or dividends – is tax free, and subsequent withdrawals are free of tax.

The product offers a broad range of investment options ranging from local cash to offshore equity; this is different to pre retirement savings which have investment restrictions limiting equity and foreign exposure. The annual contribution limit is R36,000, with a lifetime limit of R500,000. It is, however, subject to estate duty on death.

Retirement Annuities (RA)

An RA is, simply put, an individual pension fund – which can be held in addition to an employer fund – that allows people who are not part of a group scheme, or want additional savings, to enjoy the benefits of investing in a retirement fund. In terms of Prudential Investment Guidelines not more than 75% can be invested in equity and no more than 30% offshore.

From the point of view of tax benefits, these contributions are tax deductible up to the lesser of R350,000 per annum, or 27.5% of the greater of remuneration or taxable income including any taxable capital gain but prior to the deduction for donations.

All growth, no matter the source, is tax-free. There are potential benefits with respect to estate duties or executor fees on death.

Many financial commentators condemn the tax value of RAs but we’ve run the numbers and there is definitive value-add. It is, however, important to have a balance of discretionary and non-discretionary savings in your portfolio so that you create different tax and liquidity profiles.

Section 12J investments

A section 12J investment has a tax incentive for individuals, trusts or small business corporations through tax-deductible investments into Section 12J venture capital companies. The maximum contribution for natural persons and Trusts is R2 500 000 and R5 000 000 for companies.  Remember that the contribution is deducted before that of an RA thus reducing taxable income and you may not get the full tax benefit of your RA contribution. Also, you must stay invested for at least five years, otherwise your tax saving will be recouped by SARS. On exit, your base cost in determining CGT will be taken as zero

This is an investment category where you must look closely at the underlying investments, the investment strategy and issuer compliance before getting too excited about the potential tax saving.

As it stands there are two more opportunities to contribute to a section 12J investment being the 2020/2021 and the 2021/2022 tax years. There is a sunset clause which takes effect in June 2022; at this stage it’s unclear whether Treasury are going to extend the investment window.

It’s important to remember that investing only for a tax benefit is likely to lead to disappointment. So, you should first always consider the merit of an investment product itself and only thereafter assess the tax advantages, if any. 

As Private Wealth Managers, we’re here to help you make better choices for your ultimate objectives - whether for current needs, retirement or legacy purposes - to build and preserve your wealth by diversifying your portfolio, investing for the long term, ensuring sufficient liquidity and optimising your investment results according to your specific risk tolerance. Partner with us for peace of mind. 

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