Tax on savings

By Rowan Burger: Liberty Head of Retirement Reform

There were some surprising announcements on the taxation of investments which will affect the way you structure your financial plan




The recent tax changes announced in the budget speech provided some tax relief but a number of provisions are detrimental to savers. It is important that these are understood when forming an appropriate investment strategy.

Two important amendments are:

• The introduction of Dividend Withholding Tax (DWT)
• An increase in the taxation of capital gains.

Dividend tax


As expected, the secondary tax on companies (STC) fell away and has been replaced by a dividend tax. However, the 15% dividend tax rate was higher than the widely expected 10%, which would have been in line with STC.

This means a 50% increase in the taxation of dividends. Given that the current dividend yield is about 3%, the extra 5% tax will mean a 0.15% reduction in annual equity returns for the individual investor.

For a typical, balanced investment strategy (moderate to aggressive) with about two-thirds in equity, the impact over a 40 year accumulation period for a saver would be roughly 4%.


Capital Gains Tax (CGT)


The minister of finance announced an increase in the inclusion rate for capital gains from 25% to 33%. This means that the maximum rate payable for capital gains tax rises from 10% to 13.3%.

However, to assist middle-income earners the minister also increased the tax exclusion (the amount of capital gains one can make before paying tax) from R20 000 to R30 000. This also extended to the capital gains tax exclusion for primary residence which has risen from R1.5 million to R2 million.

The new proposals mean that one-third of all capital gains will now be taxable for an individual taxpayer as opposed to one-quarter which applied previously. It is a little more difficult to determine the impact in this instance. We will need to make some assumptions to illustrate the effect.

• Equities will grow at 8% in addition to the 3% paid as dividends.
• We will ignore the tax exclusion for the purposes of the calculation.
• The average tax rate of the individual is 35%.

In this situation, CGT would apply to the 8% equity growth – of which one-third is now taxable – as well as to currency appreciation on foreign investments and profits from bond trading. A typical balanced fund would pay 0.2% extra in tax per year, resulting in a roughly 8% reduction in expected value at retirement.


Impact on retirement savings


The good news is that pension funds (and retirement annuities) are granted tax exemptions on both dividend and capital gains tax and therefore will not be paying this tax. This means the full 10% on dividends will be passed on to fund members (previously STC would have been paid).

Applying the logic above, this means an estimated additional 8% for your typical pension fund member at retirement after 40 years of saving.

CGT does not apply to your pension fund savings.


Impact on discretionary savings


The increase in dividend tax and capital gains tax will affect people who have savings outside of a retirement structure, especially if they rely on dividend income or the selling of units for income.

However, it does not necessarily make financial sense to move your savings into a retirement structure. There are normally charges associated with switching products and pension savings products tend to be more expensive than unit trusts because of additional regulation and generally funds are only available at retirement.

You are probably best served by leaving your investments as they are and saving future money into pension products like retirement annuities if you do not need access to the funds.


Tax incentivised savings scheme


Additional taxes may be offset partially by the proposed short-term tax incentivised savings scheme. Government proposes to introduce tax-preferred savings and investment vehicles by 2014.

The proposal is that individuals should be allowed to save up to R30 000 a year in a registered savings or investment product that would be free of tax on interest, dividends or capital gains. This would represent a monthly saving of R2 500.

A R500 000 lifetime limit is proposed which means an individual saving R30 000 a year would reach the limit within 16 years. However, Treasury says this limit will be reviewed and may be increased at a later date.


Tax concessions on retirement savings 


In the previous budget, individuals would be allowed to save 22.5% of all income into a retirement structure. This is part of government’s plan to align the rules on all retirement products (pension funds, preservation funds and retirement annuities).

This original proposal has been extended slightly to allow people over 45 to claim a deduction of 27.5%, rather than the original 22.5%, and the maximum contribution a year has been increased from R200 000 to R300 000.

While this has been seen by many commentators as a concession, it should be pointed out that 27.5% is broadly the effective deductible amount for all savers currently if you combine the amount an individual can save through a provident fund and retirement annuity.

The introduction of this cap means that those behind on their savings plans should look to maximise their deductions while the current, more favourable opportunity remains.

Remember, your financial adviser can help you make the most of your finances by helping you develop a financial plan that suits your circumstances and making sure that you stay on track with your finances.

KZN Curry Contest

If you can read this whole story without laughing then there's no hope for you. I was crying by the end.

Note: Please take time to read this slowly. It has nothing to do with insurance or investments but we had a good laugh when reading it !

For those of you who have lived in KZN, you know how typical this is.
They actually have a Curry Cook-off about June/July.
It takes up a major portion of a parking lot at the Royal Show in PMB.

Judge #3 was an inexperienced food critic named Frank, who was visiting from America.

Frank: "Recently, I was honored to be selected as a judge at a Curry Cook-off. The original person called in sick at the last moment and I happened to be standing there at the judge's table asking for directions to the Beer Garden when the call came in. I was assured by the other two judges (Natal Indians) that the curry wouldn't be all that spicy and, besides, they told me I could have free beer during the tasting, so I accepted".


Here are the scorecard notes from the event:

CURRY # 1 - SEELAN'S MANIAC MONSTER TOMATO CURRY...


Judge # 1 -- A little too heavy on the tomato. Amusing kick.

Judge # 2 -- Nice smooth tomato flavour. Very mild.

Judge # 3 -- (Frank) -- Holy shit, what the hell is this stuff? You could remove dried paint from your driveway. Took me two beers to put the flames out. I hope that's the worst one. These people are crazy.



CURRY #2 - PHOENIX BBQ CHICKEN CURRY...


Judge # 1 -- Smoky, with a hint of chicken. Slight chili tang.

Judge # 2 -- Exciting BBQ flavor, needs more peppers to be taken seriously.

Judge # 3 -- Keep this out of the reach of children. I'm not sure what I'm supposed to taste besides pain. I had to wave off two people who wanted to give me the Heimlich maneuver! They had to rush in more beer when they saw the look on my face.



CURRY # 3 - SHAMILA'S FAMOUS "BURN DOWN THE GARAGE" CURRY...


Judge # 1 -- Excellent firehouse curry. Great kick.

Judge # 2 -- A bit salty, good use of chili peppers.

Judge # 3 -- Call 911. I've located a uraniums pill. My nose feels like I have been snorting Drain Cleaner. Everyone knows the routine by now. Get me more beer before I ignite. Barmaid pounded me on the back, now my backbone is in the front part of my chest. I'm getting pissed from all the beer.



CHILI # 4 - BABOO'S BLACK MAGIC BEAN CURRY...


Judge # 1 -- Black bean curry with almost no spice. Disappointing.

Judge # 2 -- Hint of lime in the black beans. Good side dish for fish or other mild foods, not much of a curry.

Judge # 3 -- I felt something scraping across my tongue, but was unable to taste it. Is it possible to burn out taste buds? Shareen, the beer maid, was standing behind me with fresh refills. That 200kg woman is starting to look HOT...just like this nuclear waste I'm eating! Is chili an aphrodisiac?



CHILI # 5 LALL'S LEGAL LIP REMOVER...


Judge # 1 -- Meaty, strong curry. Cayenne peppers freshly ground, adding considerable kick. Very impressive.

Judge # 2 -- Average beef curry, could use more tomato. Must admit the chili peppers make a strong statement.

Judge # 3 -- My ears are ringing, sweat is pouring off my forehead and I can no longer focus my eyes. I farted and four people behind me needed paramedics. The contestant seemed offended when I told her that her chili had given me brain damage. Shareen saved my tongue from bleeding by pouring beer directly on it from the pitcher. I wonder if I'm burning my lips off. It really pisses me off that the other judges asked me to stop screaming. Screw them.



CHILI # 6 - VERISHNEE'S VEGETARIAN VARIETY...


Judge # 1 -- Thin yet bold vegetarian variety curry. Good balance of spices and peppers.

Judge # 2 -- The best yet. Aggressive use of peppers, onions, and garlic. Superb.

Judge # 3 -- My intestines are now a straight pipe filled with gaseous, sulfuric flames. I am definitely going to shit myself if I fart and I'm worried it will eat through the chair. No one seems inclined to stand behind me except that Shareen - that kinky bitch seems to be enjoying this. Can't feel my lips anymore. I need to wipe my ass with a snow cone ice-cream.




CHILI # 7 - SELINA'S "MOTHER-IN-LAW'S-TONGUE" CURRY...


Judge # 1 -- A mediocre curry with too much reliance on canned peppers.

Judge # 2 -- Ho hum, tastes as if the chef literally threw in a can of chili peppers at the last moment. (I should take note at this stage that I am worried about Judge # 3. He appears to be in a bit of distress as he is cursing uncontrollably).

Judge # 3 -- You could put a grenade in my mouth, pull the pin, and I wouldn't feel a f"*&_g thing. I've lost sight in one eye, and the world sounds like it is made of rushing water. My shirt is covered with curry which slid unnoticed out of my mouth. My pants are full of lava to match my shirt. At least, during the autopsy, they'll know what killed me. I've decided to stop breathing- it's too painful. Screw it; I'm not getting any oxygen anyway. If I need air I'll just suck it in through the 4-inch hole in my stomach.



CHILI # 8 - NAIDOO'S TOENAIL CURLING CURRY...


Judge # 1 -- The perfect ending. This is a nice blend curry. Not too bold but spicy enough to declare its existence.

Judge # 2 -- This final entry is a good, balanced curry. Neither mild nor hot. Sorry to see that most of it was lost when Judge #3 farted, passed out, fell over and pulled the curry pot down on top of himself. Not sure if he's going to make it. Poor man, wonder how he'd have reacted to really hot curry?

Judge # 3 - No Report.