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Key tax implications of national budget for investments

The 2012/13 national budget contains a number of tax implications for investments. This article gives an overview of the most important effects thereof on investments.

Capital Gains Tax (CGT)

Increases in effective capital gains tax rates have been tabled as of 1 March 2012‚ as have adjustments to the relevant exemption thresholds.

  • The inclusion rate for individuals and special trusts will increase to 33.3% (from 25%)‚ shifting their maximum effective capital gains tax rate to 13.3% (from 10%).
  • The inclusion rate for other entities (companies and other trusts) will increase to 66.6% (from 50%)‚ shifting their maximum effective capital gains tax rates to 18.6% for companies (up from 15%) and 26.7% for other trusts (up from 20%).
  • The annual exclusion of R20 000 has been increased to R30 000.
  • The exclusion amount on death of R200 000 has been increased to R300 000.

The impact on investments is:

Personal Pensions
Retirement Annuity
Preservation Funds
Preservation Plans
Living Annuities
Exempt from CGT.
Increased CGT rate has no tax impact.
Unit Trust Funds
Endowment Plans
Subject to the increased CGT rate and higher tax.

The selling and switching of units within an investment are deemed to be asset disposals and will attract CGT. Investors should avoid unnecessary unit trust switches to keep CGT at a minimum.

Ad hoc or regular investment withdrawals by the unit holder result in unit disposals that will attract CGT. Investors should avoid unnecessary withdrawals and excessive income payments to keep CGT at a minimum.

Dividend Withholding Tax (DWT)

As previously announced‚ a withholding tax on dividends has replaced Secondary Tax on Companies on 1 April 2012. DWT will be withheld from dividends paid by local companies as well as foreign companies with shares listed on the JSE at a rate of 15% (whereas 10% was previously expected). Exemptions apply for domestic retirement funds‚ PBOs‚ domestic companies and other exempt persons.

The impact on investments is:

Pensions
Retirement Annuity
Preservation Funds
Preservation Plans
Living Annuities
Exempt from DWT.
Introduction of DWT has no tax impact.
Unit Trust Funds
Endowment Plans
Subject to DWT at a rate of 15% (unless exempted by SARS).

Direct impact on net dividend received. (DWT is paid by individual investors and reduces their dividend payments. STC was paid by companies while individual investors received their full dividend.)

It is widely anticipated that to compensate individual investors for the dividend reduction that DWT will result in‚ companies will distribute proportionately higher dividend amounts. While this would negate the impact of DWT in investments subject to the tax‚ it will hold the significant advantage of boosting dividend income in exempt investments such as retirement funds and living annuities.

Taxation on retirement funds

Individual taxation on retirement annuity (RA) contributions (2012/2013):

  • RA funds are not subject to income tax‚ CGT or DWT.
  • RA contributions remain tax deductible for the greater of 15% of non-retirement funding income‚ R3 500 less pension fund contributions or R1 750.
  • Contributions in excess of this amount are carried forward to the following year of assessment or‚ should the maximum tax deductible contribution still be exceeded‚ to the first year in which the excess can be taken into consideration. This benefit can roll over until retirement‚ in which case an investor will be allowed a proportionally greater tax-free lump sum benefit than the R315 000 otherwise provided for.

Government has proposed the following retirement reforms‚ to come into effect on 1 March 2014 (2013/2014):

  • Individual taxpayer deductions will be set at 22.5% and 27.5% (for those below 45 years and 45 and above respectively) of the higher of remuneration or taxable income.
  • Annual deductions will be limited to R250 000 and R300 000 for taxpayers below 45 years and above 45 years respectively. This means that RA contributions for investors who earn above R1,67 m and R2,33 m respectively will not get the usual 15% of non-retirement funding. As such‚ the impact of these caps is not expected to be too far-reaching. Note that to help lower income earners invest for their retirement‚ the first R20 000 of contributions are tax-deductible regardless of income (i.e. not limited to 15% of non-retirement funding income).
  • In addition‚ non-deductible contributions (in excess of the thresholds) will be exempt from income tax if‚ on retirement‚ they are taken as either part of the lump sum or as annuity income.

Tax on lump sum awards following retirement or retrenchment:

The tax-free lump sum benefit upon retirement has remained constant at R315 000. Rates according to which lump sum awards following retirement or retrenchment are taxed, have also remained constant:

Taxable incomeRate of tax
R0 – R315‚0000% of taxable income
R315 001 – R630 00018% of taxable income above R315 000
R630 001 – R945 000R56 700 + 27% of taxable income above R630 000
R945 001 and aboveR141 750 + 36% of taxable income above R945 000

Tax on lump sum withdrawals

Tax rates on retirement fund lump sum withdrawals have remained constant:

Taxable incomeRate of tax
R0 – R22 5000% of taxable income
R22 501 – R600 00018% of taxable income above R22 500
R600 001 – R900 000R103‚950 + 27% of taxable income above R600 000
R900 001 and aboveR184 950 + 36% of taxable income above R900 000

All considerations above will apply to the PPS and OPN Personal Pensions‚ the new generation PPS Retirement Annuity and‚ where applicable‚ to the PPS Preservation Funds and the OPN Preservation Plans.

Exemptions

Tax exemptions on interest earned have remained constant:

  • up to R22 800 per annum for investors under the age of 65
  • up to R33 000 per annum for investors 65 years and older
  • foreign interest and foreign dividends are only exempt up to R3 700 out of the total exemption.

As a result‚ investors are able to invest a reasonable proportion of their portfolios in fixed income instruments without incurring income tax liability.

For more information, contact Suzette van Niekerk of Exceed Private Client Services (Pty) Ltd on tel. 021 852 0382 or e-mail suzette@exceed.co.za