Cash is king - the Receiver tends to agree

By Stephan Joubert (CFP®)

It is that time of the year and the king has come to collect his dues. We find ourselves crunching numbers and frantically looking for anything that resembles a supporting document in a desperate effort to only pay what we deem to be due to the South African Revenue Service (SARS). Despite all our efforts we may find that we still owe the Receiver a pretty penny. Why?

When we focus our attention on the Income Tax Act’s definition of Gross Income we find that SARS wants their share of much more than just our hard-earned salaries. As per section 1(1) of the Income Tax Act the term Gross Income can be broadly defined as the total amount in cash or otherwise, received or accrued to a resident during a year of assessment which is not of a capital nature. A South African tax resident needs to bear in mind that this is also applicable to your worldwide income. This means that you are taxed on employment remuneration, commission income, fringe benefits, rental income, income from speculative trading, income generated from side-hustles and yes, even on the interest generated from your retirement nest egg.

We find that saving is a daunting task for the working class, especially during these tumultuous times. It requires an immense amount of discipline and constantly keeping your eye on your individual goals and objectives. It is demoralizing to say the least when we find out that the Receiver also wants a piece of the pie.

For this reason, it is of great importance that we remain vigilant of the effect of taxes on our investment portfolio.

A typical, well diversified investment portfolio traditionally consists of asset classes such as cash, bonds, property and equities. Not only are the various asset classes subject to various levels of risk and expected returns, but the different asset classes are also taxed differently.

During times of uncertainty investors’ portfolios tend to be overweight in cash investments. As registered tax practitioners we find that our clients are prompted to declare a surprisingly large amount of interest income to SARS. Remember, interest is regarded as gross income as per the definition. Taxpayers are granted an exemption, but the excess is taxed at your marginal tax rate.

To illustrate this, let’s assume a taxpayer under age 65 at the maximum marginal rate (45%) has R1,000,000 invested in a money market yielding returns of 9% per annum. When he receives his assessment, he finds that he must pay over R 29,790 to the Receiver. Not only could this be a severe blow to already constrained cash flow, but this also translates to roughly 3% cost on your capital.

Incurring unnecessary costs over and above your investment’s Effective Annual Costs (EAC) is one of many factors that may slowly erode the value of a poorly structured investment portfolio. Seeking the advice of a Certified Financial Planner (CFP®) could help in reducing your tax burden and at the same time leave you with more in your retirement pot.

 

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