Category Retirement
SUB CATEGORIES Annuties |  General |  Savings & Investments | 

Tax relief on interest: could have been more generous, but take it while it lasts

27 February 2012 Sean Segar - Head of Product, Nedgroup Investments, Cash Solutions

One of the disappointments of this year’s budget is that the exemptions on interest received were not raised and there were hints that these may be scrapped altogether in the near future. They would be replaced by “tax-preferred savings and investments ac

These would generate completely tax free returns from interest, capital gains and dividends with annual contributions limited to R30 000per taxpayer and capped out at R500 000. The interest rate exemption is one of the few remaining tax breaks and the pockets of many investors will be hurt when they go. The high level of investment in interest generating investments illustrates just how much the interest exemption encouraged saving. Morningstar figures show R250 billion invested in Money Market unit trust funds, R30 billion in Property unit trusts, and a further R135 billion invested in other income unit trust funds. Most of these investors are individuals who, by my calculations, would be worse off under the proposed scheme.

For those fortunate enough to be sitting on surplus cash, the lowest interest rates in 30 years have meant poor pickings when it comes to interest received. This is made worse by taxes of up to 40% which could see after-tax interest rates shaved down to just 3%.

Fortunately, interest exemptions have offered some tax relief to most income investors, encouraging low risk saving. Applying the interest exemption for the 2013 tax year to persons over 65 years old means that R600 000 could be invested tax free assuming interest rates of 5.5%. If you are retired with no other taxable income you will also be able to utilise your tax rebate against interest income. The tax threshold for a person over the age of 75 is R110 889 which means a further R2 016 164 can be invested tax free at 5.5%. A married couple both over 75 years old, with no other taxable income, can therefore invest a whopping R5 232 327 between them, without paying any tax on interest. While this was expected to increase by more in the budget, it is still a big number and more than most have invested anyway.

Of course all interest earned in a retirement fund is also tax free resulting low risk money market and income funds offering reasonable returns with a degree of capital preservation.

The proposed tax preferred savings and investment accounts come at a time which is witnessing the demise of the once thriving dividend income fund sector. Many investors opted for dividend income funds without first taking advantage of their tax exemptions. Investors will be hoping that the alternative to the current tax-free interest income caps takes longer to implement like most of the other government initiatives in this space, because following the surprise 15% rate of the dividend withholding tax there are not many options for tax effective yield.

A full spectrum of well-managed and credible interest earning investment vehicles is available and it is well worth maximising your interest income without resorting to the dangerous game of indiscriminate yield chasing.

One needs look no further than the highly regulated unit trust industry which offers a wide choice of fixed income products from low risk but bank-beating money market funds, to income and bond funds for investors with more risk appetite.

Mark Twain once said that the only difference between a tax man and a taxidermist is that the taxidermist at least leaves the skin. But while many of us begrudge the taxman for not increasing the interest rate exemptions for the 2013 tax year, the ability to earn tax free interest is still one of the few benefits available from him and should be taken with open hands. It is no sin to arrange ones tax affairs to keep taxes as low as possible and even if SARS does not like this they cannot compel smart taxpayers to pay more than they have to.

Kerry Packer, the Australian media tycoon, put it bluntly, “Of course I am minimising my tax ... and if anybody in this country doesn't minimise their tax, they want their heads read.”

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