Sam asks: Why are we encouraged to invest when in the long run we have to pay a large sum of tax on the money earned? Why are taxes like capital gains tax, for example, in exchange traded funds not mentioned to the potential investor?
Surely these investments are really not that feasible since most of the money will go to the tax man. I do realize that Sars has to be paid, however will this payment not eat up my investment?
Maya replies: Sam, I think I am going to send your question to the Treasury because it raises an important point — if you are trying to encourage saving, why are you taxing us!
The first point is that investments in shares (even via exchange traded funds and unit trusts), do not attract income tax unlike a bank deposit. This makes them more tax efficient.
For example if you invested R100 000 into a bank account and received 10% interest (R10 000) and your marginal tax rate was 40%, then you would pay R4 000 in tax.
If you invested R100 000 into an exchange traded fund and it grew by 10% and you sold it, you would pay (assuming a tax rate of 40%) capital gains tax of 10% on the gain or R1 000.
(For this comparison I did not take into account the tax exemption on the first R22 000 of interest income or R17 500 of capital gain. With these tax exemptions in both cases no tax would be payable if they were your only investment)
I agree that brochures probably should mention that capital gains tax is payable, but it is less than what you would pay on interest and everyone’s tax liability is different. If you only had a marginal tax rate of 25%, you would only pay 6,25% capital gains tax. At most you would pay 10% of your gain to Sars.
The second point is that if you want to avoid capital gains tax completely then you can invest in retirement products like your company pension or provident fund or a retirement annuity. These funds are exempt from both tax on interest income and capital gains tax.
Here government is acknowledging the need to encourage saving for retirement. The problem is that these products are not always as cost effective and are not flexible.
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