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Financial Literacy
Benjamin Franklin (the American inventor, journalist, printer, diplomat and statesman) made the following statement on 13 November 1789:
“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes”.
There are however tax concessions which SARS makes available which lessens the tax burden substantially, and especially with regards to investments and the use of different investment vehicles.
The first R22,800 (or R33,000 for individuals older than 65 years) of interest income received is exempt from income tax. These exemptions are increased annually to take inflation into account and are the total for a tax year (it cannot be applied separately for different financial products).
Individuals must therefore make optimal use of the annual interest exemptions. For example, a couple both younger than 65 who have an investment which yields an income of 10% per annum can invest R456,000 therein to receive R45,600 (R22,800 per individual) as income, free of any income tax. A couple both older than 65 who have an investment which yields an income of 10% per annum can place R660,000 therein to receive R66,000 (R33,000 per individual) as income, free of any income tax.
No Capital Gains Tax (‘CGT’) is applicable with interest investments.
The conduit principle is applicable to unit trusts and individuals are taxed annually on interest and foreign dividends which are declared, irrespective if income is withdrawn or re-invested.
Individuals are only liable for CGT on gains made within a unit trust if units are sold or if portfolios are rebalanced. In such a case the first R20,000 per annum of capital gains are exempt from CGT. All gains above R20,000 are then taxed at 25% multiplied by the individual’s marginal rate of income tax.
To take advantage of the annual CGT exemption individuals can switch the funds within their unit trust portfolio every year. By doing this they will create a new basis point for future CGT liabilities. The CGT exemption can however not be carried over to future years, and it is only applicable to a specific tax year in which the gain was made.
There are currently no income tax and CGT implications with regards to income (interest, dividends and rental income) which is generated within a retirement fund, and this is a massive advantage over unit trusts where individuals are taxed annually on the income generated, irrespective of whether it is withdrawn or re-invested. When the new proposed taxation on dividends is rolled out soon it will also not be applicable to retirement funds.
Amount |
Rate |
First R25,000 |
0% |
Between R25,001 and R660,000 |
18% |
Between R660,001 and R990,000 |
27% |
More than R990,001 |
36% |
Fund benefits can however be transferred to a registered preservation fund or RA fund without any tax levied on the transfer.
Amount |
Rate |
First R500,000 |
0% |
Between R500,001 and R700,000 |
18% |
Between R700,001 and R1,050,000 |
27% |
More than R1,050,001 |
36% |
Fund benefits can however be transferred to a guaranteed annuity or investment linked living annuity (‘ILLA’) without any tax levied on the transfer.
Endowments are governed by the Long Term Insurance Act of 1998 and are taxed according to the “four funds approach”. These four funds refer to separate pools for individuals, companies, corporate entities and non-taxable entities, and each of these are taxed differently.
Rental and interest generated within endowments are taxed at a flat rate 30% per annum. The interest- and dividend exemptions available for individuals are not available within endowments.
Capital gains generated are taxed at a flat rate of 7.5% per annum. The CGT exemption available for individuals are however not taken into account when the 7.5% calculation is done.
Above taxation is paid on behalf of the individual who is the owner of the endowment, and when the endowment matures at the end of the term the proceeds will not be subject to any tax because the gains were taxed within the vehicle through the term of investment.
Therefore, in our opinion, individuals only benefit by investing in endowments if they have already used their interest exemption on other investments and their marginal income tax rate exceeds 30%.
Endowments were sold extensively in the past by financial advisers because of the high commissions which they earned on these sales, in contrast to the relatively low commission structures which unit trusts offer. Many individuals still have endowments which are not suited for their needs.
These policies can however be cancelled prematurely and the proceeds can then be invested elsewhere (interest investment, unit trust or retirement fund). The life assurance companies may however levy penalties on the early termination and individuals should ask for quotations before these policies are cancelled.
Type of investment |
Investment fund |
Interest investment |
Allan Gray Money Market |
Unit trust |
Allan Gray Stable Fund |
RA fund (contributions deductible) |
Allan Gray Stable Fund |
RA fund (contributions not deductible) |
Allan Gray Stable Fund |
Endowment |
Allan Gray Stable Fund |
Investment contributions: |
R2,500 per month, no escalation |
Yield on investments: |
10% per annum |
Tax rate on endowments: |
30% per annum |
Tax rate on local dividends: |
0% per annum |
Marginal income tax rate: |
20% per annum |
Interest exemption: |
R21,000 per annum, escalating at 10% per annum through the investment term. |
“Income comprises of: |
Interest investment - 100% interest Unit trust, Retirement Fund, Endowment - 90% interest, 10% local dividends |
Type of investment |
Fund value |
RA fund (deductible contributions) |
R2,277,175.01 |
RA fund (non-deductible contributions) |
R1,914,242.27 |
Unit trust |
R1,902,310.83 |
Interest investment |
R1,880,369.37 |
Endowment |
R1,324,764.37 |
It is worth noting that the RA fund would have performed the best over the investment term of 20 years, despite the negative perception which the public and the media still have over this type of investment.
There are many factors to consider with the choice of a specific investment of which taxation is only one.
Please contact us if you want to re-balance your investment portfolio or if you require more information about the above article.