Why tax is becoming one of the most important investment decisions

For years, investment success was judged mainly on returns. Tax planning was often left for year-end and treated as a separate exercise.

That approach is no longer enough. For high-net-worth investors in South Africa, tax can have a major effect on long-term outcomes. In a market shaped by high marginal rates, changing legislation and closer scrutiny from SARS, the question is not only what you earn, but what you keep after tax.

Tax is one of the few predictable drags on investment performance. Unlike market volatility, its effect is cumulative. Small inefficiencies may look harmless in one year, but over time they can materially reduce portfolio value. In South Africa, the top marginal income tax rate remains 45%, dividends tax is 20%, and capital gains tax for individuals can reach an effective 18%, based on a 40% inclusion rate. These are not side issues. They shape net returns over the long term.

That is why more investors are looking beyond pre-tax performance. What matters in practice is how much wealth remains after tax and costs.

Take two investors with similar portfolios and the same annual return. If one portfolio is structured poorly from a tax perspective, the drag from income tax, dividends tax and capital gains tax will steadily chip away at performance. A one or two percentage point difference may not sound dramatic, but over a decade or more the effect of compounding can turn that gap into a meaningful loss of wealth. In other words, identical gross returns can produce very different real outcomes.

This has moved tax planning from a compliance exercise to a core part of investment strategy. For high-net-worth investors, tax now needs to be built into portfolio construction, asset allocation and decisions about when to sell.

SARS has strengthened its data and enforcement capabilities in recent years. With broader third-party reporting and more international information sharing, tax transparency has increased sharply.

High-net-worth individuals are under particular scrutiny, especially where structures are complex or assets are held across borders. That makes proactive planning and compliance even more important. Poorly executed strategies can hurt returns and create legal and reputational risk.

In this environment, tax strategy needs to be robust, transparent and aligned with current legislation. The trend is moving away from opaque structures and towards legitimate, defensible efficiency.

Different assets are taxed in different ways. Interest is generally taxed at your marginal rate once exemptions are used up. Rental income is also taxed at marginal rates. Dividends are subject to withholding tax, while capital gains usually receive more favourable treatment. Getting the mix right, and holding the right assets in the right structures, can make a meaningful difference over time.

One of the clearest examples is asset location. Retirement funds allow interest, dividends and capital gains to grow without tax inside the fund. Tax-free savings accounts also offer tax-free growth, within contribution limits. Deciding which assets belong in which vehicle can improve long-term after-tax returns.

Investors may also use local and offshore structures to improve tax efficiency, provided these arrangements are appropriate, compliant and aligned with their broader financial plan.

The right structure can help investors manage when tax is paid and, in some cases, reduce the effective rate. But suitability depends on the investor’s full picture, including liquidity needs, estate planning goals and time horizon.

International diversification adds another layer. As more South Africans invest offshore, they face issues such as foreign withholding taxes, reporting requirements and cross-border estate planning. An investment that looks attractive before tax may look very different once those factors are included.

Capital gains tax management has also become more important. Because tax is usually triggered when an asset is sold, frequent trading can create a heavier tax burden than a disciplined long-term approach. Delaying the sale of an asset can leave more capital invested for longer, allowing it to keep compounding. On the other hand, selling funds and reinvesting in other solutions like withdrawing from a unit trust to invest offshore in years where you have not used your full Capital Gains exemption could also help you to reset the base cost of your investments. Although using your exemption is allowed, triggering a capital loss to reduce your tax liability and then buying the same asset within 45 days is not allowed and will get flagged by SARS.

Timing matters too. Delaying a sale by a few months may move the tax event into a new tax year, which can benefit your overall tax liability. Spreading disposals over more than one year may also help prevent income from being pushed into a higher marginal bracket.

Behaviour matters as well. Investors who react emotionally to market moves may create avoidable tax events through frequent buying and selling. A long-term, tax-aware approach can help reduce this risk.

Integrated advice across investments, tax and estate planning
The strongest tax outcomes usually come from holistic planning. Investment decisions, tax planning and estate planning cannot be treated as separate workstreams.

An investment choice can affect estate duty. A trust structure can influence both capital gains tax and income tax. If these decisions are made in isolation, investors may end up with a result that works in one area but weakens the bigger plan.

That is why advice increasingly draws on investment expertise, tax knowledge and fiduciary planning at the same time. The aim is to make sure decisions work together, not against each other.

Effective tax planning is not about aggressive avoidance or complex schemes. It is about using the rules properly: making use of available exemptions, choosing suitable structures, managing capital gains carefully and aligning investment decisions with broader financial goals.

For high-net-worth investors, the shift is significant. The goal is no longer only to chase the highest return. It is to maximise how much of that return remains available to fund future goals, whether that is retirement, wealth preservation, philanthropy or passing wealth to the next generation.

In a more complex tax and regulatory environment, tax can no longer be treated as an administrative afterthought. It now influences almost every major financial decision. Investors who plan with tax in mind are often better placed to preserve and grow wealth over time.

The lesson is simple. Investment performance still matters, but it is only part of the picture. Over time, consistent tax efficiency can be just as powerful as strong returns. Investors should make sure their investment strategy, tax position and estate plan work together, and get advice where needed to avoid leaving money on the table.