SIMON BROWN: I’m chatting now with Nerina Visser. She is of course a director at etfSA. Monday March 1 was an exciting day. It means that our annual tax-free limit resets. The minister did not change the limits in his budget speech last week, so we are set at R36 000 per individual per tax year, March to February, and of course a lifetime limit of R0.5 million remains.
Nerina good morning, I appreciate your time. I think it’s well known that I’m a simple chap. I go and buy my one ETF (exchange-traded fund). I did it on Monday morning with great excitement. You take a more nuanced approach, you are proactive, passive. You’d be looking at your new allocation of tax-free money and thinking to yourself, where best? Where do I want to perhaps top up in certain spaces – rather than just as I (Simon) do, drop it into one.
NERINA VISSER: Yes, indeed. Absolutely, Simon. One of the main reasons why I do prefer the nuanced approach is I think it’s quite unfortunate that we tend to use the term “tax-free savings account”. That’s the first problem that I have. I prefer “tax-free investment account” because of course you can have your tax-free savings account at a bank, where you only have a savings account and where you only earn interest, which means that you’re going to be earning that interest tax-free.
But in my book, that’s really a bit of a waste of your tax-fee allowance, because if we think of the R36 000 that we can invest in a year, the amount of interest we’re going to earn on that is quite paltry, quite measly. We already as individuals get R23 800 per tax year of interest without having to pay tax on it.
If you think, this allowance only earning interest is a bit of a waste.
So I turn my attention to the two other major components of tax that we can save in a tax-free investment account, and that’s dividend-withholding tax and capital-gains tax.
Now dividend-withholding tax is something that you’re going to be saving literally from the first dividend that you receive in your tax-free investment account. If you hold that ETF in a regular normal discretionary account, can you think every dividend that you receive will automatically be paid back to Sars, it’s withheld, you didn’t even see it, whereas if you hold that exact same ETF in your tax-free investment account, you get the full dividend. So the benefit starts from day one. That’s one of the main important reasons why I love it when I hear people like you say, March 1, first thing I did first thing in the morning was I invested my R36 000 that I’ve got available.
The capital gains tax, of course, is the major component over the longer term. So there is a bit of a time horizon question as to what ETF should I be putting into my tax-free investment account because, especially for a longer-term, as I believe it should be, the potential to save capital gains tax over the long term is astounding. It really is quite profound. And so my main preference for investments inside my tax investment account is ETFs that are going to give me very good and strong capital gains over the long term, because that’s where and how I’m going to be saving the most tax.
SIMON BROWN: It’s like your point in dividends. I hadn’t thought of that, that I score from day one the CGT I’m going to get in 40 years’ time. I may be very old by then, but I take your point. Those dividends kick from day one.
My next question is, is it a lump sum or monthly? Let’s assume that the listener is a lucky individual who’s got that R36 000 on Monday – to my mind the maths says do the one-off. And of course, there’s also the flip side, which is about sleeping well at night. But the maths does say do it all at once.
NERINA VISSER: Absolutely. For various reasons that is the simple answer, the theoretical answer, the correct answer – but it’s maybe not the one that fits the best in your stomach.
So I tend to look then at the source of that money. Where is it coming from? Do I really have that R36 000 available? If not, then certainly a monthly contribution, a regular recurring investment is great. It’s a wonderful habit to have, to have that regular investment. But should you really have that R36 000, then absolutely the best is to put it in as a lump sum.
But this is where it gets quite interesting. What I quite like to do is, you might be looking at your budget, at your money in your bank account and say, I don’t have that R36 000 available. But maybe you have a regular investment account where you already hold R36 000, at least that, of investments. And then I’m saying to you, you know what, that exact same ETF that you hold in your regular investment account, why didn’t you sell it out of the investment account and go and buy it in your tax investment account? Now you’ve not taken a view on am I buying high or buying low, or selling high or selling low.
All I’ve done is I’ve bought and sold in the same level of the market. I’ve taken it out of an account where I don’t have any tax protection or tax benefit, and I have just brought it into an account where I’ve got those benefits.
So now I don’t have to stress about, oh, did I buy it at the wrong time, did I buy at the wrong level? I’ve just moved it to a more tax-beneficial account. And then I can always continue to build up more assets inside my discretionary investment income.
Next year, I can do the rest at the next phase because, bear in mind, if I’m going to be selling R36 000 worth of ETF investment out of my discretionary account, my regular account, there’s no way I could have incurred R40 000 worth of capital gains in that discretionary account because that’s the amount of capital gains that I can make every year, on which I also don’t have to pay tax. So in this way I’m ensuring that I’m doing this in completely a tax-neutral way, and I know I have my R36 000 sitting in my tax-free investment account, and I’m getting that full benefit from day one.
SIMON BROWN: That is so deeply cunning, so deeply cunning. Switch your R36 000, if you have it, and then put your monthly contributions in, because essentially on the last contribution it puts you a full 11 months ahead. You may think 11 months, but you’ve stacked it over years.
Nerina Visser, etfSA director, that’s why we have your on. That is the cunningest thing I’ve heard all year. I really appreciate your early morning.