When you are offered a tax benefit… take it with both hands!
- February 1, 2023
- Posted by: Activ8 Capital Management
- Category: Tax
Death and taxes… the two things in this world that simply cannot be avoided. Knowing the time of your demise is pretty much impossible but, when it comes to taxes, the Income Tax Act offers taxpayers some strategies to minimise the burden of having to part with your hard-earned wealth.
A sobering thought is that only 6% of South Africans can retire comfortably by the age of 65!
Retirement Annuities (RA) and Tax-Free Savings Accounts (TFSA) give taxpayers significant tax advantages over time by ensuring that their savings and investments grow without the burden and obliteration of tax leakage.
A simulation of a regular Unit Trust Investment Account vs a TFSA illustrates the investment benefits.
Figure 1: Source 10X
An investment of R36,000 per annum, with a R500,000 lifetime contribution cap, assuming an annual growth of 10% p.a., would over 20 years yield a net return of R2,290,000. The equivalent investment in a tax-free savings account over the same period would return R2,817,309. In short, over time the compounding effect of the tax savings in the TFSA can amount to as much as an additional R527,309 or a 23% additional return on your investment.
Similarly, a Retirement Annuity, which is a long-term savings vehicle, offers similar and additional tax benefits. Allowable contributions made to your Retirement Annuity are tax deductible. This means that SARS subsidises a portion of your contributions based on your marginal tax bracket. If you are on the 45% marginal tax bracket, a contribution of R100,000 p.a. to a retirement annuity, will only cost you R55,000. However, you will benefit from the growth of the full R100,000 invested.
Investors must take note that there are certain regulatory restrictions with each of these investment vehicles. Not surprising that the government won’t let us have too much of a good thing. You only receive a tax deduction on your retirement annuity contributions if they are below 27.5% of your pensionable salary, subject to a maximum cap of R350,000 per annum. Retirement annuities can also only be accessed when investors are 55 years and older, and tax consequences apply when you access the funds for retirement.
A Tax-Free Savings Account allows only R36,000 per year to be invested, with a lifetime limit of R500,000. Once these limits are reached, punitive taxes apply.
The limits applicable to these accounts are annual limits, measured over South Africa’s financial year, i.e. 1 March – 28 February.
It is important to note that the asset managers have cut off dates around a week before the financial year end so act timeously to avoid missing the deadlines.
We encourage you to make contact with your Activ8 Advisor, who will advise and assist you in the most conducive manner to access these tax beneficial investments for new or existing accounts.