Budget takes us back to basics
Tax: Considered by many a different form of “capital punishment” – or at least a lifelong sentence. So investors would have paid keen attention to the tax amendments put forward in National Treasury’s 2012/13 Budget, and would have watched as further judg
In addition, the 1st of April will see Dividend Withholding Tax (DWT) replace Secondary Tax on Companies (STC). Whereas investors previously received the full divided declared to them (and companies paid STC over and above their dividend distributions), DWT will be now be deducted from dividend payments at a rate of 15% (higher than the 10% originally anticipated). This will be withheld from the dividend distribution and paid directly to SARS, so unless exempted from DWT or from paying the full DWT rate, an investor will only receive 75% of any dividend distributed.
But all is not as gloomy as it appears. In particular, having always offered very welcome tax relief, your personal pension or retirement annuity (both known as an RA) is looking even more attractive now.
As RAs are not subject to income tax, CGT or DWT, they offer investors a very welcome tax break up front. In addition, annual RA contributions remain tax deductible for the greater of 15% of non-retirement funding income, R3,500 less pension fund contributions or R1,750. And should an investor contribute more than this maximum amount in any given year, excess contributions 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 stipulated amount otherwise provided for.
Although Government has indicated that it will cap these annual deductions from March 2014, it is currently proposed that maximum deductions are set at R250,000 and R300,000 for investors under the age of 45 and 45 years and older respectively. These caps will therefore only apply to investors who earn above R1.67m and R2.33m respectively. And even should these investors’ contributions exceed these thresholds, their tax benefit will, in essence, simply be deferred, as excess contributions will be tax exempt on retirement if they are taken as either part of a lump sum or as annuity income.
The increased accessibility of new generation, unit-trust based RAs also means that investors stand to benefit not only from a more flexible and transparent retirement savings solution, but also from one that is likely to incur significantly lower fees. Unlike old generation, policy-based products, new generation RAs generally allow investors to reduce or stop contributions, to transfer out of the product or to switch between underlying asset managers without incurring transaction costs.
Finally, it should also be kept in mind that it is widely anticipated that in order 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 annuities.
So, if you have not yet met with your financial intermediaries to conduct an annual review of your investment portfolios, now, having entered the new tax year, may be a good opportunity to do so. Not only will this allow perspective on whether you remain on track to successfully target your personal investment objectives, but it will also offer the chance to evaluate whether your portfolios are structured in the most tax efficient manner.
