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11 July 2009


There is a saying that goes There are two certainties in live, namely Death and Taxes. The reality is that you will be taxed till your death We all know that Caesar demands his pound of flesh, but fortunately you do not get taxed on all income from your investments. From the 1 of January 2001 our tax system changed to a residence-based tax system. This means that you will be taxed on all your investments, whether the investments are in the Republic of South Africa or abroad. The scope of this article is not go into too much detail about the taxation on foreign investments. We will focus on South African based investments and mainly on interest bearing investments, like fixed deposits and shares. There are mainly two types of taxes that have an influence on the average investor namely: 1. Income Tax 2. Capital Gain Tax Under normal circumstances you receive two types of income from your investments namely interest (on eg. fixed deposits) and dividends (on your shares). The income tax act is very clear on the fact that interest is a taxable income, however, there are a handful of tax cases that argued the sources of interest and so forth. Once again the scope of this article is not to argue the technical tax aspects of interest and dividends. Under section 10 of the income tax act there are two very important exemptions applicable to interest and dividends namely: 1. The first R21 000 of interest that you receive on your investment is exempt from tax, if you are younger than 65 years, and R30 000 if you are 65 years and older. Keep in mind that if you are married in community of property any interest would be split 50/50 between you and your spouse. (There are certain exemptions) 2. All dividends from local companies received by accrued to a shareholder are exempt from tax in terms of section 10(1)(k). We have to keep in mind, however, that any interest and dividends that a South African resident receive from foreign investments, are treated as interest. Only the first R3 500 received as interest will be exempt from tax. If a person receives R10 000 from a foreign company as dividend and that is his/her only income, he/she will be taxed on the balance of R6 500. If, for example, an investor owns a South African balanced unit trust investment, he has a fair possibility to receive local interest and dividends as well as foreign interest and dividends. In a case like that all the above rules would apply. In other words the first R21 000 of the local interest would be exempt from tax,

as well as all dividends, but the foreign interest and dividends that exceed R3 500 would be taxable together with the local interest. Lets use a comprehensive example: Income Received: Local Interest Local Dividends Foreign Interest Foreign Dividends Tax calculation: Total Income Exempt Income: Local Dividends Foreign Dividends + Interest Local Interest (R21 000 R3 500) Taxable Income R50 000 R 3 500 R17 500 R71 000 R14 000 R85 000 R25 000 R50 000 R 5 000 R 5 000

There are times when the interest you receive is not taxed in your own hands, but in the hands of someone else. Most investors believe that the investment they do via their endowment policies and/or retirement annuities are tax free. This thought is only partly correct, because interest and rental income that accrued in an endowment are taxed in terms of the four fund approach. This merely means that the taxes are paid at different tax rates. The individual policy holder fund (this is the fund where the investor is a natural person) is taxed at a rate of 30%. All interests and rental income accrued to a retirement are tax free. It is important to understand this concept, because it is not necessarily true that it is more tax effective to invest your monies via a policy structure like an endowment. Should you take the cost implications of a policy structure into consideration you will find that the structure is only effective for the person with a very high average tax rate. Since the introduction of Capital Gains Tax (CGT), with effect from the 1 of October 2001, the investment environment has changed dramatically. One has to understand that this is not a separate tax. th CGT is levied and charge in terms of the 8 Schedule of the Income Tax Act. Only the disposal of an asset activates the liability for CGT. Disposal is defined as any event, act, forbearance or operation of law which result in the creation, variation, transfer or extinction of an asset For our purposes we will consider the sale of a share or unit trust as an event for purposes of CGT. In a very simplistic manner, the difference between the selling price and the buying price (base costs) of such asset, would be represent the gain or loss. A percentage (25%) of this gain or loss, less a rebate of R17 500 per annum would be added to your taxable income.

Lets take the following example: Original Investment in a Unit Trust Investment Value at redemption Gross Capital Gain Rebate Nett Capital Gain Inclusion rate @ 25% R500 000 R750 000 R250 000 R 17 500 R232 500 R 58 125

Therefore R58 125 would be included to your other taxable income to determine your tax payable. The administration for these two issues could be cumbersome, therefore it is recommended to contact your financial advisor for assistance.

Rynoe Smith is a financial planner at PSG Konsult.