Know your tax

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5 June 2018

Tax Tables, Capital Gains Tax and some handy tax exemptions to help prepare you for the 2019 Tax Year. 


Who sets the tax rates?

February is an important month on the South African financial calendar, not only is it the last month of the tax year but also the month where our Finance Minister presents the National Budget.

The National Budget is important because it contains all the information you need regarding taxes that will be applicable for the next tax year.

A tax year runs from 1 March to 28 February and every February the Minister of Finance sets out the tax rates that will apply for the tax year.

When it comes to investing, understanding the taxes you pay can help you make smart decisions that could save you money in the long run.

February is a great month to review your taxes and finances and plan for the year ahead.

Three important taxes that might affect you
  1. Personal Income Tax (PIT)

Personal Income Tax (PIT) rates for individual taxpayers are announced each year in the National Budget and are only applicable to a certain tax year. These tax rates are shown in the form of a table (see below).

RATES OF TAX FOR INDIVIDUALS

For the period (Tax year) 1 March 2018 to 28 February 2019

Tax Bracket

Taxable Income (R)

Rates of Tax (R)

1

  0 – 195 850

  18% of taxable income

2

  195 851 – 305 850

  35 253 + 26% of taxable income above 195 850

3

  305 851 – 423 300

  63 853 + 31% of taxable income above 305 850

4

  423 301 – 555 600

  100 263 + 36% of taxable income above 423 300

5

  555 601 – 708 310

  147 891 + 39% of taxable income above 555 600

6

  708 311 – 1 500 000

  207 448 + 41% of taxable income above 708 310

7

  1 500 001 and above

  532 041 + 45 of taxable income above 1 500 000

How does the table work?

For the purpose of explanation let’s consider a very simplistic example of Jack who earns taxable income in the 2018 tax year (1 Mar 2018 to 28 Feb 2019) of R 250 000 from his salary. He will be taxed as follows:

Step 1 – Check which tax bracket applies as per the table above for the tax year

Jack falls into tax bracket number 2 as he earned taxable income of R 250 000 which is between the R 195 851 and R 305 850 taxable income band.  

Step 2 – Calculate the amount to tax according to the tax table

R 250 000 (His salary / taxable income) – R 195 850 (Tax bracket 2) = R 54 150

Step 3 – Apply the tax rate

R 54 150 x 26% (Tax bracket 2) = R 14 079

Step 4 - Add the tax per the table to determine the tax due

R 14 079 + 35 253 (Tax bracket 2) = R 49 332 (Tax due)

In the case of Jack his employer would have to deduct tax on a monthly basis from his salary and pay this over to the South African Revenue Services (SARS). If not Jack would be liable to pay SARS in the region of R 49 332 at the end of the tax year.

Knowing how much tax you pay is important so that you can plan your finances properly and not be caught off guard due to an unexpected tax bill.

 

  1. Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a tax charged on all gains (increase in value) made on most investments and assets (things like certain unit trusts, shares in companies and properties with certain exclusions) that one owns and payable when these are sold.

Jack also invested R 50 000 in a unit trust that invests in listed shares which grew to R 100 000. Jack was happy with this performance and sold this unit trust. Because of this, he has a capital gain of R 50 000 (R 100 000 – R 50 000) which will be taxed.

The tax rate (inclusion rate) applicable to CGT is 40%, which means that 40% of a capital gain will be included as part of your income to be taxed as per the personal income tax (PIT) table above.

The good news is that in a tax year the first R 40 000 gain you make is free from having to pay CGT. Through proper awareness and planning you can use this exemption and limit the amount of CGT that you pay in a tax year.

This exemption is particularly handy when it comes to making a withdrawal from an investment that is subject to CGT.

If we were to include the sale of Jack’s unit trust investment, his PIT calculation would be something along the following lines:

Step 1 - Work out the Capital Gain

Jack invested R 50 000 and sold the unit trust for R 100 000 so his Capital Gain is R 50 000 (R 100 000 – R 50 000)

Step 2 – Deduct the R 40 000 annual exclusion 

R 50 000 (Gain) – R 40 000 (annual exclusion) = R 10 000 (Subject to CGT)

Step 3 – Apply the 40% CGT tax rate

R 10 000 x 40% (Inclusion rate) = R 4000 (additional amount to be added to Jack’s taxable income of R 250 000)

Step 4 – Add the R 4000 to Jack’s taxable income

R 250 000 (His salary / taxable income) + R 4000 (CGT amount to be included) = R 254 000 (Total taxable income)

Step 5 – Check which Tax Bracket applies as per the PIT table for the tax year

Jack still falls into tax bracket number 2 as he earned taxable income of R 254 000 which is between the R 195 851 and R 305 850 taxable income band  

Step 6 – Calculate the amount to tax according to the tax table

R 254 000 (His salary / taxable income) – R 195 850 (Tax bracket 2) = R 58 150

Step 7 – Apply the tax rate

R 58 150 x 26% (Tax bracket 2) = R 15 119

Step 8 - Add the tax per the table to determine the Tax due

R 15 119 + 35 253 (Tax bracket 2) = R 50 372 (Tax due)

Similarly to PIT, it is important to enquire whether you must pay CGT when selling your investments and then make doubly sure you have enough money available to avoid being cash strapped. 

 

  1. Dividend Withholding Tax (DWT)

When investing in shares of certain companies, investors are rewarded by receiving dividends from the company.

In other words, you invest in shares and the company pays you a dividend which is effectively a share (your share) in the profit that the company makes. But these dividends are taxed at 20% by SARS before they are paid to you as an investor. This tax is known as Dividend Withholding Tax (DWT).

Even though an individual does not directly have to pay the DWT themselves to SARS, it is still important to know that tax effects dividends and that dividend investments attract tax.

Useful exemptions that save you Tax
  1. Interest exemption

The first R 23 800 that you earn from all your investments that generate interest (money market funds, cash accounts, savings account, fixed deposits etc.) is free from paying tax if you are under the age of 65. Put differently, in today’s terms, if you invest roughly R 297 500 in a money market investment (unit trust) at an interest rate of 8% p.a, you could earn another R 1 983 per month tax free if you are an individual under the age of 65.

It gets even better if you are over the age of 65 as you could earn R 2 875 per month (R 34 500 per annum) tax free by investing R 431 250 in a money market investment earning 8% interest p.a.  

Making use of this exemption is rather useful for your short-term savings and goals such as emergency funds. 

  1. R 33 000 Tax Free

In a tax year you are allowed to contribute R 33 000 to a tax free savings account (TFSA). What this means, is that R 33 000 of your money can grow without having to pay tax at all in a TFSA.

Just be careful though not to contribute more than the R 33 000 in a tax year or you will be taxed at 40% on the amount exceeding R 33 000. Taking full advantage of this annual exemption limit can lead to great tax savings for investors over time. 

  1. A great tax saving investment

One of the easiest ways to really save tax in the long run is to invest in a tax-free savings account like the OUTvest Tax Free plan. There is absolutely no CGT, DWT or PIT applicable when investing in a TFSA.

In our opinion, it is truly one of the best investments you can make and one that every person should consider having as part of their investment portfolio. 

Know your tax, stay informed

Every cent is important when investing and the more you invest, the greater your chances of getting ahead. Check the tax rates in the National Budget each year and where necessary make adjustments to your investments to ensure you save tax where possible.

Ask our skilled advisors or speak to your tax consultant about the effects of taxation applicable to your investments and stay informed.

 

 

All tax examples, amounts and benefits used in this article are for illustrative purposes only and have intentionally been kept simplistic.  Although we have tried to set out some key information to consider, we are not tax professionals and we suggest you speak to your tax consultant for any advice on your personal tax. Returns or benefits are not guaranteed and are dependent on the performance of the underlying assets and variable market factors.
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