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STRAT DOC 2Q18 – TAX BREAKS TO HELP YOUR INVESTMENT STRATEGY

11 April 2018

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by Brendan Gace

Many people are feeling stretched by the ever-increasing tax burden, on top of this loopholes which existed in the past keep getting closed. However, there are a number of opportunities still available to investors to reduce their overall tax burden. We look at some of these opportunities that exist in the overall planning of your investment portfolio. We use the following base assumptions: a 10% p.a. growth assumption; a tax payer in the top tax bracket of 45%; and an effective capital gains tax (CGT) rate of 18%.

First up is using the allowable retirement annuity / pension / provident contributions. Each taxpayer is permitted to contribute up to 27.5% of taxable income up to a maximum of R350,000 p.a. This will equate to an annual tax saving of R157,500 p.a. That equates to an additional retirement capital sum of ±R9mn over 20 years.

Next, each taxpayer is permitted to make an annual donation of R100,000 p.a. Over 20 years this could amount to over R5.7mn being outside of one’s estate, in a family trust. The CGT saving would be ± R666,000, and just over R1mn would be saved in estate duty.

Use your annual capital gain exemption of R40,000 p.a. or LOSE IT. The tax saved is a mere R7,200 p.a., however, that will equate to a saving of R412,000 over 20 years.

The tax-free savings account allows for a lifetime contribution of R500,000 and a maximum of R33,000 p.a. Assuming this is invested into an equity portfolio, the CGT savings would be ±R123,000 after 20 years. This tax saving would be even larger if you set these accounts up for children or grandchildren and stayed invested for longer periods of time.

How you invest and diversify your portfolio can also amount to significant tax savings. For example, if you had R5mn invested in your Pension fund and R5mn of personal discretionary investments, the normal practice is to place both amounts into a balanced or moderate investment strategy with a mix of equites/ cash / bonds and property. If you split both investments equally your result would look something like this:

The pension fund investments are exempt from CGT, Income tax of interest and rental, and dividends tax. The personal funds are all subject to these taxes. Using the same assumptions, the estimated tax on personal funds, if invested this way, would amount to ±R150,000 tax p.a.

If you restructured the portfolios with the same overall asset allocation but moved assets around a bit to look something like this:

The result would be a tax bill of ±R85,000 p.a. This is a reduction of around 1.17% p.a. in tax payable. If you use this percentage saving on an initial investment of R5mn over 20 years, the tax saving will mean your final investment value is enhanced by over R6.4mn.

Finally, all these tax savings can be improved further by doubling up on the tax savings by using these allowances for your spouse. These simple steps of using available tax breaks and getting the compounding benefit over a number of years will mean that your pot of money in later years is hugely enhanced.

*Before making these types of changes please consult with a financial planner or your tax practitioner to ensure that these solutions are appropriate for your circumstances.

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