We are pleased to share the video recording, presentation slides and executive summary from our recent Tax Optimisation webinar.
The following topics were discussed in detail:
- Investment taxation: How growth, interest and dividends are taxed
- Offshore investing: Understand the tax implications of direct offshore exposure
- Tax-saving strategies: Tools and structures to improve tax efficiency
- Retirement income planning: Balancing tax efficiency with liquidity needs
- Emigration and Tax Effects: Understanding the implications of changing your tax-residency.
Please see the recording of the webinar and presentation slides below.
(Apologies for Stuart’s poor audio in the beginning of the webinar presentation.)
We provide information from the webinar below:
Investment Taxation Overview
Understanding South Africa’s Tax System
In South Africa, the income you receive is either taxed automatically through a platform or payroll (Pay-as-you-earn), or requires to be declared and paid manually. When calculating your tax, it is important to take both into consideration.
We provide examples below:
PAYE (Automatically Taxed) | Self-Declared Income |
Salary | Interest Income |
Bonuses | Rental Income |
Commission | Trust/Company Distributions |
Pension / Annuity Income | Capital Gains |
Leave Pay | Freelance / Consulting Income |
Fringe Benefits | Offshore Income |
Local Dividends | Foreign Dividends |
Marginal vs Effective Tax Rates
Your marginal tax rate is the rate applied to your last rand of income, while your effective tax rate is the average rate you pay across all income.
This distinction is crucial when planning for investment income, which is typically taxed at your marginal rate.
Annual Taxable Income | Marginal Tax Rate | Effective Tax Rate |
R500,000 | 31% | 20% |
R1,000,000 | 41% | 29% |
R2,000,000 | 45% | 35% |
R5,000,000 | 45% | 41% |
Capital Gains Tax (CGT)
Capital Gains Tax is triggered when you sell an asset for more than its base cost. The tax is not applied to the full gain but to a portion of it, depending on your taxpayer category. Knowing how CGT is calculated can help you plan asset disposals more effectively.
Taxpayer Type | Inclusion Rate | Max Effective Tax Rate |
Individuals & Special Trusts | 40% | 18% |
Companies | 80% | 21.6% |
Trusts (Excl. Special Trusts) | 80% | 36% |
CGT Exemptions
- R40,000 annual exclusion
- R2 million exclusion on primary residence
- R300,000 in year of death
- Personal use assets (e.g. cars, furniture)
Example: CGT Calculation
Item | Amount |
Sale Price | R5,000,000 |
Base Cost | R4,000,000 |
Capital Gain | R1,000,000 |
Less Annual Exclusion | R40,000 |
Net Gain | R960,000 |
Inclusion (40%) | R384,000 |
Tax at 41% | R157,440 |
Effective CGT Rate | 15.7% |
Investment Scenarios: Tax Impact
Different types of investment income are taxed differently. This section compares the after-tax outcomes of three investment strategies over five years, each starting with R10 million and earning 10% annually.
Scenario | After-Tax Value | Total Tax Paid | Effective Return |
Interest Only | R14.0 million | R1.72 million | 7.0% |
Capital Gains Only | R15.2 million | R901,000 | 8.8% |
Blended Growth | R14.86 million | R1.11 million | 8.3% |
Tax-Efficient Investment Vehicles
Choosing the right investment vehicle can significantly reduce your tax liability. Here’s a breakdown of the most tax-efficient options available to South African investors, and their key taxation characteristics.
Tax-Free Investment Accounts (TFIs)
Feature | Details |
Annual Contribution Limit | R36,000 (R3,000/month) |
Lifetime Limit | R500,000 |
Tax on Growth | 0% |
Tax on Withdrawals | 0% |
Endowments & Wrappers (Sinking Funds)
Tax Element | Rate |
Capital Gains Tax | 12% |
Interest Income | 30% |
Dividends | 20% (withholding) |
Tax Administration & Reporting | Handled by insurer |
Retirement Funds: Retirement Annuity, Pension Fund, Provident Fund, Preservation Fund
Contribution Deduction | Limit |
% of Income | 27.5% |
Annual Cap | R350,000 |
Capital Growth | 100% Tax-Free |
Offshore Investing: Direct vs Indirect
Investing offshore can be done directly or indirectly. The tax implications differ significantly between the two approaches, especially when it comes to capital gains and currency depreciation.
Feature | Indirect (Feeder Fund) | Direct Offshore (Wrapper) |
Currency | ZAR | USD/GBP/EUR |
Tax on Rand Weakness | Yes | No |
CGT Rate | Up to 18% | 12% |
Withdrawals | SA bank only | Any global account |
Case Study: 10-Year Investment
We provide an example comparing a feeder fund and direct offshore fund’s tax implications.
Metric | Feeder Fund (ZAR) | Direct Offshore (USD) |
Starting Value | R10,000,000 | $816,327 |
Capital Gain | R21,434,000 | R17,015,570 |
CGT Payable | R3,848,557 | R2,049,408 |
Final Value (After Tax) | R27,572,314 | R29,714,710 |
Difference | +R2,142,395 |
Real-World Scenarios
These practical examples show how small changes in investment structure can lead to significant tax savings.
Scenario: R20M Portfolio (Annuity + Savings)
Component | Value | Tax Paid | Outcome |
Living Annuity | R10M | R170,798 (PAYE) | R549,202 annuity income |
Fixed Deposit | R10M | R369,000 | R900,000 interest income |
Total Tax | R539,798 |
Optimised Version: Annuity + Wrapper
Component | Value | Tax Paid | Outcome |
Living Annuity | R10M (Income Funds) | R170,798 | R549,202 income |
SA Wrapper | R10M (Balanced Funds) | R145,800 | No personal tax due |
Total Tax | R316,598 |
Section 10C of the Income Tax Act on Excess Contributions
When contributions to retirement funds exceed the annual deduction limit (27.5% of taxable income or R350,000), these excess amounts are recorded for future tax benefits. Although they don’t receive immediate tax relief, they are tracked and can be paid out tax-free when the individual starts drawing an income from an annuity. This provision helps optimise tax benefits for retirement savings over time.
Example:
▪ A businesswoman sells her company at age 58 and receives an after-tax
capital payment of R20 million.
▪ She contributes R10 million of the lump sum to her Retirement Annuity.
▪ In the year of contribution: R350,000 is claimed as a tax deduction.
▪ The remaining R9,650,000 is recorded on her tax return as “excess
contributions”.
▪ In the following year: She retires from the RA and transfers the funds to a
Living Annuity.
▪ As she begins to draw an income from the annuity, the amounts previously
captured as excess contributions will be tax-free when paid out as annuity
income
Emigration & Exit Tax
When you cease to be a South African tax resident, SARS imposes an “exit tax” on your worldwide assets. Planning ahead can help you avoid liquidity issues and unnecessary tax burdens.
Trigger | Effect |
Ceasing SA Tax Residency | CGT on worldwide assets (deemed disposal) |
Excluded Assets | SA property, retirement funds, wrappers |
Ready to begin? Investonline is here to help you improve on your tax planning. Let one of our Financial Planners help you strategise.
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