How to gain advantage from the tax increases
The (now previous) Minister of Finance introduced a number of unwelcome changes to the taxes we pay in the 2017/2018 budget. How can you turn these hits into opportunities?
Tax on dividends increased from 15% to 20%, an increase of 33%.
- Make sure you take full advantage of RA contributions. It does not matter whether you are saving towards, or are already in, retirement. An RA is a top class savings vehicle which does not pay tax on dividends, interest or capital growth. It is not subject to estate duty. You can save 27½% of your taxable income, up to a limit of R350 000, to qualify for the tax benefit of a reduction of your taxable income.
Income tax rates have increased, up to a maximum rate of 45% for individuals.
What many people don’t realise is that the tax rates have increased right across the board, by increasing the tax bracket thresholds by less than the inflation rate.
- Contribute the maximum to an RA, as explained above. This reduces your taxable income and therefore tax payable. You save between 18% and 45% of the amount you save, depending on your tax rate.
- Contribute to a charity. You can contribute up to 10% of your taxable income to a registered Public Benefit Organisation for a reduction in your taxable income. You save between 18% and 45% of the amount donated, depending on your tax rate.
- Use your annual donation of R100 000 per year to donate to children or your trust. This may not save tax currently but could save future estate duty of 20%.
- Invest in a tax free savings account. Whilst the saving of up to R33 000 per year is not deductible, dividends, interest and capital gains are tax free.
- Save via an endowment structure. An endowment pays tax on interest at 30%, and CGT at 12%, so for many taxpayers this is a more tax effective way of investing.
Trusts now pay income tax at a rate of 45%, and capital gains tax at 36%.
- Invest via an endowment structure. An endowment pays tax on interest at 30%, and CGT at 12%, so for a trust the tax benefits are substantial.
- Interest free trust loans now carry a deemed interest taxed at the 20% donations tax rate. It may make sense to reduce the loan.
Capital gains tax for individuals has increased by the increase in income tax rates.
- You are allowed an annual exclusion of R40 000. Make sure by the end of the tax year that you have used your exclusion, or do so by selling and reinvesting a growth asset. You can save up to R18 000 per year.
Let us know if you want our help in checking whether you can take further advantage of the tax benefits.