South Africa has a highly favourable tax environment for investors but a good awareness of the legislation is required in order to make the Tax Act work for you. Always do your research to ensure you’re getting the full advantage of the provisions made in the Act and consult a tax practitioner for major decisions and tax opinions.
Neill Hobbs, Anuva Investments Co-founder and Director highlights a few key pieces of legislation that investors should consider:
Foreign pensions: Any pension (government or non-government) accumulated for services rendered outside of South Africa will not be subject to tax in this country. This also relates to any lump sum, pension or annuity received by or accrued to a South African resident from a source outside of South Africa as consideration of past employment outside this country. Considering the growing number of corporate nomads who work in different jurisdictions, this is an important piece of legislation.
Retirement annuities (RAs): RA contributions are tax-deductible and according to the Tax Act, investors can deduct up to 27.5% of their gross remuneration or taxable income (whichever is higher) in respect of total contributions to a pension, provident or RA fund. This is subject to an annual cap of ZAR350 000 per tax year.
Donations to Public Benefit Organisations (PBOs): A PBO is an entity that is created to carry out some form of public benefit activity, such as a trust or a not-for-profit organisation. PBOs who are registered and are able to provide you with an 18A certificate will allow you to deduct your donations made from your taxable income. Your deduction is capped at 10% of your taxable income.
Capital allowances and recoupments for example wear and tear: A commonly used tax allowance for property investors is the ‘wear and tear’ allowance against the more standard assets such as furniture. In terms of furniture, a taxpayer may deduct 20% of the cost of the asset per year against income until the full cost of the asset has been claimed, adding up to 5 years.
Tax-Free Savings Accounts: In March 2015, National Treasury introduced a tax-free investment product to encourage after-tax saving amongst South Africans. Contributions to the tax-free savings account are limited to ZAR30 000 per individual per year, which works out to a monthly contribution of ZAR2 500. A lifetime contribution limit of ZAR500 000 applies, which in today’s value equates to just under 17 years. All returns including interest, dividends and capital gains are entirely tax-free.
Section 12J: For less risk-averse investors, or investors who have reached the cap on their Retirement Annuity, Pension Fund and Tax-Free Savings Account contributions, a Section 12J Investment is a tool to maximise your tax deductions. Section 12J allows taxpayers a 100% tax deduction in the year of investment if they invest in SMMEs by way of subscription of shares in a Section 12J Venture Capital Company.
Hobbs advises investors to ensure effective structuring across all entities, in your individual capacity, company capacity and trust capacity. This will assist in using all the allowances and deductions available to you effectively and synergistically across the different entities.
“It is imperative to consult a tax practitioner before you start a new entity or sell a company, for example, so that you don’t miss out on structuring the relevant allowances and deductions made available by SA’s investor-friendly Tax Act to maximize your wealth,” says Hobbs.