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Tax on Investments - What you need to know

Posted under Guides

Investors have to pay tax when they earn money on their investments, like shares or unit trusts.

The main types of investment income which have income tax consequences are:

  • local and foreign interest
  • foreign dividends
  • interest from Real Estate Investment Trusts (REITs)
  • capital gains

The sale of investments (like shares) also triggers a capital gains tax event.

Dividends earned from local companies attract DWT (dividends withholding tax), but this is automatically withheld by the company who pays out the dividend, so there are no further tax obligations once you receive your net dividend (i.e after DWT).

The actual tax you pay depends on your own marginal income tax rate and the type and amount of investment income and capital gains you earn from your investments. The higher your marginal income tax rate, the more tax you will pay.

If you own investments, your financial institution should issue you a tax certificate (IT3b) which you must use to complete the investment section of your tax return. This will ensure that your taxable income is calculated accurately with the correct interest, foreign dividends and foreign tax credits included. See more details on the IT3b below.




Local interest income

If you own bonds or have cash in the bank, then the interest you earn on this will be taxed. If you hold unit trusts then these often attract interest, which is taxable too. This interest income is subject to income tax and is taxed at your marginal tax rate.

Individual taxpayers enjoy an annual exemption on all South African interest income they earn, set by SARS every year. This interest exemption has remained unchanged for a number of years and for the 2020 tax year is set at R23 800 for individuals under 65 years old, and R34 500 for individuals 65 years and older. South African Retail Savings Bonds and any interest from the money in your Medical Savings Account (of your medical aid) can also be taxed.

You need to declare local interest (source code 4201) in the Investment Income section of your tax return.




Foreign interest income

If you earn foreign interest, you need to report the Rand equivalent amount to SARS. Unlike local interest, there is no exempt portion, however you will be able to deduct any foreign tax you pay.

You need to declare foreign interest (source code 4218) in the Investment Income section of your tax return, together with the foreign tax credit which was paid in another country (source code 4113).




Local dividend income

For equities (excluding listed property companies), dividends withholding tax (DWT) of 20% is withheld before it’s paid out or reinvested. Note that DWT is payable only on dividends paid out by the companies, and is payable after the company has already paid 28% corporate tax on its net profits. 

The local dividend income you receive will not attract any further income tax in your hands and you can leave these dividends out of your tax return, as SARS doesn’t seem to have created a space for them in the tax return just yet.




Foreign dividend income

If you earn foreign dividends, you need to report the Rand equivalent amount to SARS. Unlike local dividends, these are usually taxable, however you will be able to deduct any foreign tax you pay in the country where the dividends were received.

The most amount of tax you will ever pay on a foreign dividend is 20%. This is because SARS uses a formula to determine the amount of the dividend that is included in your taxable income. In some cases, the tax may even be a lot less than 20%, depending on the country where the dividends are received from, plus what % of the company you own.

You need to declare foreign dividends (source code 4216) in the Investment Income section of your tax return, together with the foreign tax credit (source code 4112).




Income from Real Estate Investment Trust (REIT)

The tax regime associated with listed property companies in the form of Real Estate Investment Trusts (REITs) is more complicated than other asset classes. REITs are taxed differently to other listed companies: they do not pay corporate income tax, and their investors do not incur DWT on the distributions they receive. Instead, investors pay income tax on the distributions they receive from these REITS at their marginal income tax rate.

You need to declare distributions from REITS (source code 4238) in the investment income section of your tax return.




The investment tax certificate (IT3b)


An IT3b is a tax certificate received from an institution like a bank or financial services company. It will be a summary of any interest dividends (both local and foreign) and REIT that you would have earned by having money invested with one or more of these places.


Do you hold investments at any of the below institutions?

Alexander Forbes
Allan Gray
FNB
Investec
Momentum

If yes, click on the relevant link and let us guide you around your IT3(b).




What about Capital Gains Tax?


A capital gains event is triggered only when you decide to sell (part or all of) your investments, like units in a unit trust. If the price of the units has risen since you invested, this increase in value is known as a capital gain, or a capital loss if the value has declined. Currently, an amount of 40% of this capital gain (not the total proceeds) is included in your annual taxable income - this makes the maximum effective capital gains tax rate for individuals 18%. How do we work this out? By taking the maximum 45% marginal tax rate for individuals and multiplying it by 40%, that’s how.

Note that individual taxpayers currently enjoy an annual capital gain exclusion of R40 000.

Read more about Capital Gains Tax.




Tax free savings account


South Africans are not very good at saving, for a number of reasons. With most people living near or below the breadline, it’s impossible to save when you’re more concerned with merely surviving. Combine this with our high levels of consumer debt, and little in the way of personal savings, and this means that many people become financial burdens on the government in the long run. This is why the government introduced tax free savings accounts in March 2015, as a way to encourage household savings among South Africans.

Since then, financial institutions have tried to get people on board with these savings accounts, promoting them heavily on the radio, TV and online, explaining to people that they are an accessible way to save. And because they offer a tax break to consumers, this year you’ll see them referenced on your annual tax return (ITR12). Let's take a closer look at these accounts and what they mean to you as a taxpayer.


What is a tax free savings account?

This savings account offered by financial institutions invests your money in a combination of financial products like unit trusts, bank savings accounts, fixed deposits and bonds.

So how is it different? The difference between it and other savings or investment accounts is that all returns (the interest, dividends or capital gains earned), will be tax-free in your hands. This means that you’re not liable to pay tax on the growth of your investment, or if you decide to withdraw from your account.

Are there limits to tax free savings accounts?

Annual and lifetime contribution amounts
There’s an annual contribution limit of R33 000 per tax year, as well as a lifetime limit of R500 000. Once you’ve reached your lifetime contribution limit of R500 000, you can’t make any more investments into your tax-free savings account, otherwise you will be penalised by SARS.

No limit on number of accounts
Your annual limitation can be spread across as many savings accounts as you want, as long as you don’t invest more than R33 000 in total in the tax year (1 March to end February). If, for example, you’ve already contributed R20 000 to one tax free savings account in that time period, you’ll only be able to invest up to R13 000 in any others.

No carry over of annual contribution limit
Your annual limitation can’t be carried over to the next tax year - instead you simply forfeit any amount you didn’t use and are given a new annual limit of R33 000 to invest in a tax free savings account. For example, if you’ve invested R26 000 for the tax year, you can’t carry the R7000 over to the next year.

Contributing to a tax free savings account for a minor
As a parent, it’s a good idea to open a tax free savings account for your children, but you need to be aware that any contributions you make on their behalf count towards their annual and lifetime contribution limit.

Why should I take out a tax free savings account?

Get tax free growth, even if you reinvest
The biggest advantage of a tax free savings account is that your earnings on the initial investment are not taxed when you withdraw the funds. You can reinvest (or capitalise) your returns and they don’t go towards your annual or lifetime contribution limit.

For example, if you invest R33 000 for the year and receive a return on this investment of R6000 that you then re-invest, the total amount in the account will be R39 000. But you’ll still be able to invest your full R33 000 the next year as the R6000 reinvestment doesn’t count towards your annual or lifetime limit.

Unlimited withdrawals (with conditions)
You can withdraw from your tax savings account any time, however any replacement investment amount is treated like a new contribution and will therefore count towards your annual and lifetime limits.

Say you withdraw R33 000 from your tax free savings account, because you’re experiencing a temporary cashflow problem. A few months later (in the same tax year), you have a bit of spare cash again, so you deposit R33 000 back into your tax free savings account. Provided that you haven’t made any other contributions for the year, this amount takes you right up to your contribution limit for the year, plus it'll be added your overall lifetime contribution. If you’d already made a contribution in the tax year, this payment would have pushed you over your annual contribution level and SARS will penalise you (see below).

What happens if I exceed my contribution limit?

If you go over your annual or lifetime limit, SARS makes you pay a strict 40% penalty on the excess you contributed. You’ll need to pay this after assessment in the year that you exceeded the limit.

Say that in one tax year, you invest R10 000 in a tax free savings account with one institution and R30 000 in an account with another one, you will have contributed R7000 more than your annual limit of R33 000. The penalty will therefore be 40% of this excess contribution (R7,000 x 40%), which equals a R2800 tax penalty you’ll need to pay.

How do I report my tax free savings account on my tax return (ITR12)?

The financial institution holding your tax free savings account will issue you with a tax certificate called an IT3(s), which has all the details you need for your tax return like contributions, interest and dividends. Capture this information from your certificate in a new section in your tax return called Tax Free Investments.

Confused what goes where? Use TaxTim to help you complete and file your tax return and you won't need to worry. We’ll do it all for you, based on your answers to our easy questions!




Section 12J investment

The Venture Capital Company (VCC) regime was introduced to the Income Tax Act 10 years ago. In its most simple form, investors (individuals, trusts or companies) can claim a full deduction of their investment in SARS-approved “VCC funds” against their taxable income in the year of investment. This deduction becomes permanent if investors remain invested for five years.

Here’s an example to explain:

Jaco is a salaried employee, earning income at the highest marginal tax rate of 45%. Assume that Jaco has R100 000 of investable capital left in February at the end of his tax year. If he invested this amount into a suitable Section 12J fund, this amount would be deducted from his taxable income and he would be eligible for a cash refund from SARS of 45% of his investment, or R45 000. His assets would now amount to R145 000 (i.e a R100 000 Section 12J investment plus a cash refund of R45 000).

If he decided to exit his investment after five years at zero percent growth (which is assumed for simplicity, although realistically the investment itself may also have grown since) the tax deduction will become permanent and the CGT (capital gains tax) due on the investment made would amount to R18 000 (i.e R100 000 x 40% inclusion x 45% effective tax rate). Note that the investment is always considered to have a zero-base cost and therefore the gain would be equal to the proceeds. Assume for the purpose of this example, that he already used up his R40 000 annual capital gains exclusion on another asset disposal in the year.

In order to claim this deduction, you would need to indicate in the opening wizard of your return that you invested in a s12J VCC. This would result in the relevant section opening up where you can enter the details of your investment (i.e name of VCC, VCC number, amount invested and the date of your investment). You would need to ensure that you have the relevant tax certificate from the VCC in order to prove your deduction.

For more about S12, read our guest blog here).




FAQ

I received R36 000 interest on my bank account – how will this be taxed?

The first R23 800 of interest is tax free for taxpayers under 65 years, while the threshold amount is R34 500 for those over 65 years. After that, the difference is added to your income and taxed at your marginal rate, according to the tax bracket you fit into.

What are the tax implications of investing in offshore unit trusts and shares and how do I disclose it in my tax return?

You would need to request a statement from the financial institution and convert the investment income to Rands (if applicable). You would need to declare the interest, dividends and capital gains in your tax return and would also need to reflect the foreign tax which has been withheld.

I have two IT3b documents from different sources. Should I add them together?

Yes, you need to add each amount under the same source code together and enter the total. For example, if one has interest (4201) of R150 and the other has interest (4201) of R21 000 you must enter the total of R21 150 for local interest in your tax return.

Do I need to declare my interest from a unit trust if it is under the threshold? i.e R23 800

Yes, you need to declare the interest, even if you won’t be liable for tax.

I'm a stay at home mom, aged 45. The only income I earn is from interest (R100 000), dividends (R15 000) and REIT Income (R25 000). I currently only file one tax return per year. Should I be registered for provisional tax due to the investment income I earn?

Since your total annual taxable income is above the tax threshold which is currently R79 000 (2020), and your taxable income from interest and REIT income is greater than R30 000, then yes you do need to register as a provisional taxpayer. Please also work through our decision tree to determine whether you are a Provisional Taxpayer.



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