23/02/2021
What are the taxes levied on investments?
As an investor, the money you earn on your investment has tax consequences i.e. you may be liable for tax on money made from your investments.
Lets look at the main taxes you need to be aware of that are triggered by investment income:
1. Interest income
(a) Interest from local sources
In the event that you have cash in a bank or any other financial institution or you are invested in bonds or any other taxable interest bearing asset - the interest you earn in those accounts will be taxed.
This interest is included in taxable income and taxed at your marginal rate of tax.
SARS provides relief to taxpayers in the form of an interest exemption which is currently R23 800 for people under 65 and R34 500 for people over 65. This means, if you earn interest that is equal to or less than R23 800 (for under 65), then that interest will be exempt from tax.
(b) Interest from foreign sources
Unfortunately, the goodwill of SARS on interest income is not extended to foreign interest income. There is no exemption for foreign interest income. In the event that you earned foreign interest, you will need to report the rand equivalent to SARS. They arent too cruel though😅 as they will allow you to deduct any foreign tax you pay on the interest earned.
2. Dividend Income
(a) Local dividend Income
Dividends Withholding Tax (DWT) of 20% is withheld for all dividends from equities (except listed property enterprises). This withholding tax is held back by the company before paying out dividends. This means the money you get as a dividend is already nett of tax. This dividends will therefore not attract any further taxes in your hands.
(b) Foreign dividend income
Foreign dividends are unfortunately not as straightforward as local dividends but can be grouped into two categories:
* If as a taxpayer, you hold less than 10% of the equity shares and voting rights in the foreign company, then the dividends received will be taxed. These dividends are taxed at a maximum effective rate of 20% via the normal tax system. In the event that any foreign tax was paid, this should be declared so that SARS can offset it against the local tax payable.
** If as a taxpayer, you hold more than 10% of the equity shares and voting rights in the foreign company, then the full (100%) of the foreign dividend will be exempt (i.e. not taxed) in the taxpayers's hands.
3. Income from REITs
Listed property is the black sheep of the investment income family, being a little more complicated than other asset categories - but I wont bore you with too much detail.
What you should know as an investor is that distributions received from REITs will be included in the taxable income of the investor and taxed at their marginal tax rate.
4. Capital Gains Tax (CGT)
This tax is triggered upon the sale of equities. I need to emphasise this point:
It is the selling of your shares that triggers CGT. It does not matter whether you withdraw or reinvest the money in something else, that is separate. As soon as you sell your long-term investment, CGT will be triggered.
Now back to the point at hand:
In the event that you have a capital gain, this is how it is taxed:
(a) The first R40 000 of that gain is excluded. This is as a result of the annual exclusion that all individuals are entitled to.
(b) The amount remaining after the R40 000 exclusion in (a) above, will be multilpied by 40% aka the inclusion rate. This rate is the same for everyone.
(c) The amount in (b) above is then the gain that will be included in your taxable income to be taxed at your marginal tax rate.
i.e. ( Gain - R40 000)* 40% = Net gain included in taxable income
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As you can see from all the above - the tax you will actually pay is dependent on your marginal tax rate which is why it is important to know what your marginal rate of tax is.
For all investments held, financial institutions will issue investment tax certificates (IT3b) which are used to complete the tax return to ensure that your final tax amount is correctly calculated.
This is why it is important that as soon as the tax year closes, you keep track of all investment certificates received and you ensure that nothing is outstading.
Ps - If you are invested in a TFSA, then your investment growth is tax free and you do not have to worry about these taxes (only tax will be on foreign dividends but when you sell - no CGT). See why the TFSA is the love of my life?
