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Taking advantage of your interest exemption and CGT allowance in your investment portfolio

The tax payable depends on the investor’s marginal income tax rate and the type or amount of investment income.

As the end of the year of assessment approaches, 1 March 2021/28 February 2022, investors should consider reviewing their investment portfolios and take advantage of their annual interest or dividend exemption as well as capital gains tax (GCT) allowance.

Investments such as equity, shares, unit trust portfolios and interest-bearing accounts, hedge funds etc, may earn an investor local or foreign interest, dividends or trigger a capital gain. A capital gain is triggered when the investor transacts. Transactions include withdrawals and switching from one underlying fund to another.

The tax payable depends on the investor’s marginal income tax rate and the type or amount of investment income as well as the capital gains an investor realises from their investments.

Income tax table 2021/2022:

Taxable income (R) Rate of tax
0 – 216 200 18% of taxable income
216 201 – 337 800 38 916 + 26% of taxable income above 216 200
337 801 – 467 500 70 532 + 31% of taxable income above 337 800
467 501 – 613 600 110 739 + 36% of taxable income above 467 500
613 601 – 782 200 163 335 + 39% of taxable income above 613 600
782 201 – 1 656 600 229 089 + 41% of taxable income above 782 200
1 656 601 and above 587 593 + 45% of taxable income above 1 656 600

The higher the investor’s marginal income tax rate, the more tax the investor pays.

Tax on dividends earned or distributed

Dividends received or accrued from South African companies or dual-listed non-resident companies are exempt from income tax but subject to dividends tax at a rate of 20%. The 20% dividends tax is generally withheld by the companies before paying the dividends out to the individual or reinvesting the dividends earned in the investor’s capacity. Thus, there are no further tax obligations once you receive your net dividend.

Dividends received by or accrued from a real estate investment trust (Reit) are subject to income tax.

Dividends earned or accrued from foreign companies are subject to income tax depending on the amount and type of shares held in the company.

  • If the individual holds more than 10% of equity shares or voting rights in a foreign company the foreign dividends received will be taxed.

Favourably, Sars grants individuals a dividends tax exemption being 25/45 of the rand value of the foreign dividends earned. Thus, the tax payable on foreign dividends will be reduced by approximately 55,56%.

  • Where the individual holds at least 10% of the equity shares or voting rights in a foreign company the foreign dividends received will be exempt from tax in the individual’s hands.

Tax on interest earned

Interest earned on an individual’s investments is subject to income tax at the individual’s marginal tax rate, which may differ ranging from 18% to 45% depending on the level of taxable income. However, individuals are granted an annual exemption on local interest earned in every tax year.

Local interest income exemptions for the 2021/2022 year of assessment:

  • R23 800 per annum for taxpayers under the age of 65,
  • R34 500 per annum for taxpayers aged 65 years and older.

Foreign interest earned on an individual’s investment is fully taxable however, individuals may declare foreign interest in their tax return enabling a tax deduction on foreign taxes already paid.

Capital gains tax

Capital gains will be taxed at the inclusion rate of the investor, individuals have a 40% inclusion rate, which makes the maximum effective CGT rate 18% (40% of 45%). If the investor falls in a lower income tax bracket the effective CGT rate should be lower.

  • An annual exclusion of R40 000 capital gain is granted to individuals and special trusts.

Please note: The annual exclusion can not be carried forward to the next year of assessment thus the importance of utilising the allowance in the current year.

How can investors make use of the annual CGT allowance and interest exemption in their investment portfolios?

Individual investors should be encouraged to make use of the annual interest exemptions being, R23 800 (for persons under the age of 65) and R34 500 (for those aged 65 & older) and the capital gains tax allowance of R40 000.

This means that investors get to enjoy tax-free returns on interest earned as well as capital gains realised.

An individual can invest in an investment vehicle that earns them local interest, in turn, their income tax liability could be reduced to the maximum of R23 800 or R34 500 depending on the individual’s age.

Individuals can also make use of the annual CGT allowance of R40 000;

  • Individuals with existing investment portfolios who are not pleased with their underlying fund selection can switch the underlying funds of their portfolios without incurring a capital gain if the possible gain is kept to a maximum gain of R40 000.
  • Individuals can also make a partial or full withdrawal on their investment portfolios without incurring a gain, provided the possible gain is kept at a maximum of R40 000.

If you have an existing discretionary investment such as, a unit trust portfolio, share account etc. and need funds but feel that you do not want to incur a capital gain, you can actually access a portion of your funds with the exception that the possible gain is in line with the annual CGT allowance.

Another way that individual investors can take advantage of the CGT allowance is by:

  • Transferring a portion of the investment to their legal spouse, thereby the spouse would be able to withdraw from the investment or switch the underlying funds of the investment portfolio.

Thus, the investor’s spouse will also have an annual CGT exclusion of R40 000 as transfers between spouses are exempt from CGT.

If you would like to take advantage of the annual interest exemption and CGT allowance before the end of the tax year, we recommend that you contact your financial advisor and discuss your options.

Alternatively, you may contact us for further information and guidance in terms of the options available to you.

ADVISOR PROFILE

Michael Haldane

Global & Local Investment Advisors

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