The only certainties in life: death and taxes.
While South Africans often feel that we receive little in return for the taxes we pay, the reality is that our tax rates are relatively low compared to many other countries. Taxes, however unpopular, are a necessary part of funding a functioning civil society. Paying tax also gives us the right to earn and grow wealth in South Africa, whether through employment, self-employment, or investment returns.
Investment returns are generated in several ways:
• Interest on capital
• Rental income from property
• Dividends from companies
• Capital gains on assets
With the exception of capital gains, all these forms of income are taxed on a one-to-one basis, meaning the full amount is included in your taxable income and taxed at your marginal rate.
Capital gains are different, and more tax-efficient.
The Capital Gains Tax (CGT) Advantage
For individuals, 60% of a capital gain is excluded from tax (companies and trusts receive only a 20% exclusion). This means only 40% of a capital gain is included in your taxable income.
In practical terms:
• For every R1.00 earned as a capital gain, only R0.40 is taxed
• For every R1.00 earned as interest, the full R1.00 is taxed
Simple Examples
If an investor realises a R100,000 capital gain, only R40,000 is taxable:
• High earner (45% tax rate), pays R18,000 — effective rate of 18%
• Average-income earner (36% tax rate), pays R14,400 — effective rate of 14.4%
• Lower-income taxpayer (18% tax rate), pays R7,200 — effective rate of 7.2%
Why CGT Is Top of Mind Right Now
Recently, many clients have noticed higher CGT bills than usual. They have made big profits. Ongoing global uncertainty and international tensions are affecting markets, which are currently relatively high and volatile.
This environment may present an opportunity to:
• Realise capital gains now
• Move into more conservative and stable investments
• Reduce exposure to higher-profile funds that may be stalling or delivering muted (or negative) returns
Additional CGT Relief
• Every taxpayer receives a R40,000 annual CGT exclusion, meaning the first R40,000 of capital gains is completely tax-free
• Retirement annuities can also be used as an effective tool to mitigate tax
Paying CGT today means it won’t be payable tomorrow. Tax rules can change. Future CGT legislation may become more onerous, making today’s known rules potentially more favourable.
And remember, if you are paying CGT, you have made a profit. If you are not, your investment has not been performing.
Nick Russell
Certified Financial Planner CFP®
Please note: This article does not constitute advice