How Budget affects your investments

PF 27Feb ear cakeIOL PF Illustration: Colin Daniel

Capital gains tax changes announced in the Budget this year mean you may need to pay more attention to where you invest your money, how you realise your investments and whether your estate will have enough cash to pay any tax liability that arises.

It was announced in the Budget this week that the maximum effective rate of capital gains tax (CGT) – paid by people on the highest tax bracket of 41 percent – will increase from 13.7 percent to 16.4 percent from March 1, but the annual exclusion on capital gains will also increase – from R30 000 to R40 000.

The effective rate of the tax will be increased by way of an increase in any capital gain you make that is added to your taxable income – the so-called inclusion rate. From March 1, 40 percent of any gain you make after you have deducted the R40 000 exclusion will be included in your taxable income.

Currently, one third of the capital gains you make on investments above the annual exclusion are included in your taxable income and taxed at your marginal tax rate. If your income puts you into the top marginal tax bracket, your highest tax rate is 41 percent, and if one-third of your taxable capital gain is taxed at 41 percent, it means your effective tax rate on the gain is 13.7 percent.

For any taxable gains made after March 1, if your income puts you into the highest marginal tax bracket and 40 percent of your taxable capital gain is taxed at 41 percent, it means your effective tax rate on the gain is 16.4 percent.

If your marginal tax rate is lower, you will pay a lower percentage of the taxable gain as tax.

If your capital gain is a lot higher than the increased annual exclusion, your CGT will be much higher under the increased tax.

Ian Beere, a financial adviser at Netto Invest and winner of the Financial Planner of the Year award in 2007, says decisions to sell high-value investments and property will need to be looked at more carefully.

People with second properties will be the most hard hit when they sell one property in search of the next opportunity, he says.

When you sell your primary residence (the property you use as your home), the capital gain that is exempt from CGT remains at R2 million.

Beere says the cost of moving home if you live in a property over the R2 million mark will become more expensive as the profits you make will attract higher CGT. This is especially the case if the property is worth more than R10 million and attracts higher transfer duties.

Hedley Lamarque, a financial adviser at BDO Wealth Advisers who holds the Certified Financial Planner accreditation, cites the example of an investor who has made a capital gain of R3 030 000 on his or her investment.

The tax payable under the existing CGT provisions will be calculated as follows: R3 030 000 less the R30 000 exclusion equals R3 000 000. This amount multiplied by 33.33 percent equals R1 000 000 in taxable income. Assuming a maximum tax rate of 41 percent, the investor will be liable for tax of R410 000.

Under the new CGT rules applicable from March 1, the CGT will be calculated as follows: R3 030 000 less the R40 000 exclusion equals R2 990 000. This amount multiplied by 40 percent equals R1 196 000 in taxable income. Assuming a maximum tax rate of 41 percent, the investor will be liable for tax of R490 360, which is R80 360 more than it would have been in the current tax year.

Lamarque suggests that, as an investor, you cash in investments on which you have made a capital gain equal to the annual exclusion each year. In other words, you would cash in investments with a R30 000 gain in the current tax year and from the 2016/17 tax year you would cash in investments with a gain of R40 000.

Capital gains are calculated by subtracting what is known as your base cost (typically the amount you invested) from the proceeds of the sale.

Lamarque says you can cash in investments on the last day of February and re-invest them the next day or soon thereafter. You will incur a small cost, but you will increase your base cost and hence reduce the taxable gain you make in future years.

A couple could effectively cash out R780 000 of gains without paying any tax over 10 years (R30 000 x 1 year + R40 000 x nine years x two people) if they have taken advantage of this tax year’s CGT exemption, or can still do so, assuming that there are no further increases to the annual exclusion.

When you die, you are deemed to have disposed of all your assets and CGT applies to any gains you made, but there is a higher exclusion on gains in the year of your death. The CGT exclusion on death is currently R300 000, and there is no increase in this amount for the tax year beginning on March 1.

This means that estates will be liable for more CGT than previously, so you need to plan to ensure that you have sufficient cash in your estate to cover this greater liability. Otherwise, the executors of your estate may be forced to sell assets.

If you have your assets in a trust, your inclusion rate for capital gains is currently 66.6 percent. This will increase to 80 percent on March 1.

Trusts are taxed at 41 percent, so the effective rate of taxation on capital gains will rise from 27.3 percent to 32.8 percent.

There are no exclusions for capital gains made in trusts, and so there is an enormous difference between the CGT you pay on the sale of a home when you own it in your own name and when it is held in a trust.


The capital gains tax increase announced in this week’s Budget will make discretionary investments under-perform retirement fund investments and tax-free savings accounts by an even wider margin, retirement consultants in the Sanlam group say.

Retirement fund investments remain the most tax- and cost- efficient investment vehicle in South Africa, they say, but the changes in CGT and tax rates do not make a very big difference to the outcome you will achieve over a very long term.

Kobus Hanekom, the head of strategy, governance and compliance, Freddy Mwabi, an actuarial specialist, and Ryan Campbell-Harris, an actuary, at Simeka Consultants and Actuaries, determined the effect that the 2016 Budget will have on retirement fund investments relative to tax-free investments and unit trusts.

The capital gains tax inclusion rate has increased from 33.3 percent to 40 percent. This increases the maximum effective rate from 13.7 percent to 16.4 percent. The exempted amount will increase from R30 000 to R40 000 a year.

The Simeka consultants calculated the lump sum after 20 years for a provident fund member who earns R10 000 a month and whose employer contributes R1 000 a month escalating at the inflation rate plus two percentage points after tax. They assumed an annual return of 11 percent (inflation plus five percentage points).

They then considered what the same investor would have as a lump sum after contributing R820 (R1000 minus tax) to a tax-free savings account or a unit trust fund earning the same return and with the same annual increase in the contribution.

Similar costs were assumed, although investment platform, retail asset management and advice fees can make investments more expensive than retirement funds.

The final investment amount was nine percent lower in the tax-free savings account and 16 percent lower in the unit trust fund than in the provident fund – 0.6 percent less than before the CGT change.

They also ran the calculations for a person on a much higher income, R800 000, paying tax at the highest marginal tax rate. This investor was also assumed to be contributing R1 000 to the provident fund and R590 after tax to the tax-free savings account and the unit trust fund.

The outcome was that the tax-free savings account delivered a lump sum 27 percent lower than that of the provident fund investment and the unit trust was 33 percent lower.

The consultants say in this calculation the CGT payable was 15 percent more after the 2016 Budget but it made only a 0.4 percentage point difference to the unit trust net return in the comparison over the longer term.


If you are not happy with the service you receive or returns you are earning on your tax-free savings account or there is a new account on the market that appears to be a better offering than the one in which you are invested, you will have to wait another six months before you can make a switch.

When the accounts were introduced on March 1 last year, regulations under the Income Tax Act stated that no transfers would be allowed from one tax-free savings account to another, or between different providers’ accounts until March 1 this year.

This was to allow financial services companies time to develop their administration processes to deal with such transfers. In the 2016 Budget Review document, National Treasury notes that the date on which such transfers will be allowed will be postponed until November 1 this year, because providers are still not ready to allow such transfers.

The review notes that regulations outlining how these transfers should take place will be published shortly.

Treasury also notes in its Budget Review document that when tax-free savings accounts were introduced, the intention was that they should not be used to avoid estate duty.

As a result, amounts in these accounts when you die are included in your estate for estate duty purposes.

The document notes that Treasury has become aware that if you invest in a life assurer’s endowment policy structured as a tax-free savings account, you can nominate a beneficiary and your savings in the account will be paid to that beneficiary free of estate duty. Treasury intends to propose an amendment to Estate Duty Act to close this loophole, but one life assurer says nominations are not allowed on these accounts.

In the Budget Review, there are no changes to the limits for contributions to tax-free savings accounts, which means you can still only contribute R30 000 a year to such an account and R500 000 over your lifetime.

The interest or returns you earn can, however, take you beyond these limits.

Your savings and any growth on them in these accounts are free of income tax on interest, dividends tax on dividends and CGT. However, even if you make any withdrawals from these accounts, you cannot put more than the annual or lifetime limit into the account. If you do exceed the limits, you will pay a tax penalty of 40 percent of the amount that exceeds the contribution limit.


* Estate duty remains at 20 percent of the dutiable estate and the exemption from estate duty remains at R3.5 million, with any unused portion of the exemption rolling over to the estate of the second-dying spouse.

* Donations tax remains at 20 percent of any donation above the exemption of R100 000 a year. Donations between spouses and to public benefit organisations are exempt from donations tax.

* Dividends tax on investments remains at 15 percent.

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