Budget takes us back to basics

Investment-related tax hikes included an increase in the maximum effective Capital Gains Tax (CGT) rate for individuals from 10 to 13.3 percent. This will have a direct impact on investors effecting transactions within any discretionary product, but individuals invested in endowment policies will feel the impact of the increased CGT rate announced for companies as well. With this maximum effective rate up from 25 to 33.3 percent, the additional expense incurred by the company underwriting the policy will eat into the overall investment pool and indirectly impact ultimate investment returns.

Secondary Tax on Companies replaced

In addition, 1 April will see Dividend Withholding Tax (DWT) replace Secondary Tax on Companies (STC). Whereas investors previously received the full divided declared to them (and companies paid STC over and above their dividend distributions), DWT will be now be deducted from dividend payments at a rate of 15 percent (higher than the 10 percent originally anticipated). This will be withheld from the dividend distribution and paid directly to SARS, so unless exempted from DWT or from paying the full DWT rate, an investor will only receive 75 percent of any dividend distributed.

But all is not as gloomy as it appears. In particular, having always offered very welcome tax relief, your personal pension or retirement annuity (both known as an RA) is looking even more attractive now.

RAs not subject to income tax

As RAs are not subject to income tax, CGT or DWT, they offer investors a very welcome tax break up front. In addition, annual RA contributions remain tax deductible for the greater of 15 percent of non-retirement funding income, R3500 less pension fund contributions or R1750. And should an investor contribute more than this maximum amount in any given year, excess contributions are carried forward to the following year of assessment or, should the maximum tax deductible contribution still be exceeded, to the first year in which the excess can be taken into consideration. This benefit can roll over until retirement, in which case an investor will be allowed a proportionally greater tax-free lump sum benefit than the stipulated amount otherwise provided for.

Although the government has indicated that it will cap these annual deductions from March, 2014, it is currently proposed that maximum deductions are set at R250 000 and R300 000 for investors under the age of 45, and 45 years and older, respectively. These caps will, therefore, only apply to investors who earn above R1.67m and R2.33m, respectively. And even should these investors' contributions exceed these thresholds, their tax benefit will, in essence, simply be deferred, as excess contributions will be tax exempt on retirement if they are taken as either part of a lump sum or as annuity income.

Increased accessibility

The increased accessibility of new-generation, unit-trust based RAs also means that investors stand to benefit not only from a more flexible and transparent retirement savings solution, but also from one that is likely to incur significantly lower fees. Unlike old-generation, policy-based products, new-generation RAs generally allow investors to reduce or stop contributions, to transfer out of the product or to switch between underlying asset managers without incurring transaction costs.

Finally, it should also be kept in mind that it is widely anticipated that in order to compensate individual investors for the dividend reduction that DWT will result in, companies will distribute proportionately higher dividend amounts. While this would negate the impact of DWT in investments subject to the tax, it will hold the significant advantage of boosting dividend income in exempt investments, such as retirement annuities.

So, if you have not yet met your financial intermediaries to conduct an annual review of your investment portfolios, now, having entered the new tax year, may be a good opportunity to do so. Not only will this allow perspective on whether you remain on track to target your personal investment objectives successfully, but it will also offer the chance to evaluate whether your portfolios are structured in the most tax efficient manner.