Frantic February and the Tax Season

As we get edge closer to the end of the tax year, many of us start thinking of ways in which to reduce our tax liability.

Some ideas to help us achieve this are to maximize contributions to retirement funds (RA’s) and top up annual contributions to Tax Free Savings Accounts (TFSA’s).

TFSA’s were introduced in March 2015 and were created in order to encourage household savings. TFSA’s can be invested in several asset classes (equities, bonds, listed property, cash etc) and will not be subject to any tax on the growth in any form (no CGT, dividends withholding tax etc) and there won’t be any income tax applicable when accessing your funds.

The disadvantage with TFSA’s is that you are limited on how much you can contribute to them. Individuals are allowed a maximum of R33,000 per tax year with a maximum lifetime contribution of R500,000.00. Any funds contributed above the R33,000 annual limit will be taxed at 40%.

Retirement Annuities (RA’s) are a great way of minimizing your tax liability. Your contributions to RA’s are tax deductible up to 27.5% of your gross taxable income, limited to R350,000 per annum. Even though you are capped on an annual basis, any contributions made over and above the maximum deductible amount will roll over to the following tax year.

There are several additional benefits one enjoys when utilizing RA’s as an investment vehicle such as estate planning benefits, tax benefits on the growth of the underlying investments and protection from creditors. It is important to note the various restrictions on asset allocations due to Regulation 28 of the Pension Funds Act which only allows a maximum of 30% as an offshore exposure and not more than 75% local equity exposure.

It is also extremely important to ensure that your underlying investments are always allocated correctly according to your needs while understanding how to drive certain costs down which will have a negative impact on the overall performance of your investment.

When deciding on what to invest in always keep in mind the following:

  • Your investment time horizon

  • Your risk tolerance (appetite for risk versus return)

  • Your liquidity requirements

  • Tax efficiency

We strongly advise that you meet with your Wealth Manager in order to discuss the overall tax efficiency of your investment portfolio.