Tax efficient investments – Johan Burger

*This content is brought to you by Brenthurst Wealth.

By Johan Burger* 

A projected revenue shortfall of about R44bn for the 2017 fiscal year was big news in recent weeks. This is widely expected to affect South Africa’s credit rating and will create a major challenge for Treasury. In simple terms there are only two options – cut state spending … or raise taxes.

It is the second option that is of concern for tax payers as rates were already increased across various forms of tax when the 2017/18 Budget was announced in February. But with careful planning there are ways to manage tax efficiency.

Brenthurst Wealth’s Johan Burger

All individuals are different and I feel there should be some sort of pecking order for all individuals to follow when handling investments. Let’s face it, not all individuals are business owners, nor have they the ability to emigrate, or have wealthy families that will support them. The fact is, most South African’s are in the same boat – you must plan and save for your own wealth and retirement, no one else will.

Some ground rules to consider:

  • Bad debt

This includes credit cards, vehicle debt and study loans. Aim to pay these off as soon as possible, as you are effectively guaranteed a higher return compared to any guaranteed investment return on the market.  A primary residence is not necessarily considered a bad debt; it does, however, make sense to repay a home loan as fast as possible in view of the current low growth environment. By paying off a bond, you are effectively guaranteed a return of 10-13%, depending on your marginal tax rate. A note on investment properties – in certain circumstances it makes sense to delay and keep a bond as big as possible. Interest on such loans is tax deductible and paying it off could create an increased tax liability. The concept of gearing is a terrific way to build wealth, however, choose the location wisely.

  • Retirement Annuities

A lot has been said about retirement annuities. Is it worth it? Asset allocation and liquidity constraints? Can only invest in a certain way – (Regulation 28) which effectively means that an investor may only have exposure to 75% in equities, only 25% to listed property and only 25% offshore.

The fact is that a retirement annuity is a very tax effective retirement saving investment vehicle. Any amounts contributed in total to a pension fund, provident fund or retirement annuity are tax deductible but limited to 27.5% of the greater of remuneration or taxable income. This is limited to a maximum of R350 000 per annum. Any excess contributions are carried forward.

Advantages include:

  • No income tax on growth, no capital gains tax or dividend withholding tax.
  • Does not form part of an estate – therefore no estate duty or executor fees.
  • Get a massive tax deduction. (For every R100 you earn and if you contribute R27.50; you only pay tax on R72.50).
  • Protected from creditors.


  • Money is fixed until age 55.
  • Only 1/3 available at retirement as lump sum.
  • Income after retirement is taxable.

I would say the most important asset for individuals is the ability to work and generate income. Most investors forget that a pension will serve that purpose. The fact that the investment is fixed until age 55 or beyond, is, in my opinion, a good thing. It may be generalisation but many individuals do not have the discipline and use savings on luxury goods and forget the main objective – that a pension is to provide an income for the day you are not working anymore. Although there are constraints with asset allocation, benefits indicate that RA’s form a vital role in tax and retirement planning.

  • Tax free savings accounts

This investment is only available to individuals. It has recently been introduced by the SA Government to encourage personal savings by incentivising individuals with a savings vehicle that is completely free from all tax. That means, no withholding tax on dividends or interest, no income tax, and no capital gains tax on any switches or withdrawals. The only drawback is that the amount that an individual can contribute into this account is capped at R33 000 per year, and R500 000 over their lifetime. We do, however, foresee that this could possibly be adjusted for inflation in future tax years. There are no asset allocation constraints, therefore you can invest 100% conservatively, 100% aggressively or even have 100% offshore exposure. This investment is open to all individual investors but is especially ideal for younger people, and even newly born babies. An investment can be made in the name of any individual. The sooner parents or grandparents open one of these for children, the better. We recommend an aggressive strategy due to the long-term outlook. As the saying goes, it’s not timing the market but time in the market that makes the difference.

  • Donation between individuals

We find many instances of donations between spouses when one of them is not earning an income. We also find that most investments are then just in the name of the one working or the one earning the highest income.

Consider the following:

Donations between spouses are free of any donations tax. Therefore, by donating an amount from one party to the other will allow that both can utilise their annual exemptions – currently R23 800 for interest (65 and younger) and R34 500 (65 and older). Both will also then be allowed an annual capital gain exemption of R40 000. By investing the largest amounts in the individual’s name with the lowest tax rate will save quite a bit on their total household tax liability.

Read also: Smart investment options for your children: Here’s what you need to know

Donation tax is currently levied at 20%, however, every individual can donate R100 000 annually. This is an effective way for parents to annually reduce their estate. This method can be utilised to invest for children in tax free savings accounts as mentioned earlier.

  • Investment wrapper/ Access investment

One of the most prominent changes in this year’s budget has been the increase of income tax for wealthy individuals earning more than R1.5 million per year (41% to 45%). The effective capital gains tax rate increased from 16.4% to 18%. Marginal rate for trusts increased to 45% with an effective CGT rate of 36%. Is it still worth it to set up a trust? That is a topic all of its own and will not be covered here – a debate for another day.

Capital Gains Tax increases over the years – is this just the beginning? What we can expect for the future?

Source: Investec

This tax implication will play a vital role in the protection of capital and the real buying power of any investment, especially taking inflation into consideration. Investments will not keep up with inflation with current tax rates, let alone pure money market investments.

Individual investors with large portfolios and all current trust investments should and in my opinion, MUST consider the following. Invest in an investment wrapper or Access vehicle.

Who can invest?

  • Individuals and Trusts

General tax benefits;

  • Investors with tax rates greater than 30% will benefit from this investment .
  • For individuals and trusts (with natural persons as beneficiaries) income tax of 30% and CGT of 12% is applied to the policy. The individual interest and CGT exemptions are not utilised, so remain intact.


  • Withdrawals are restricted during the first five years (one interest-free loan and one surrender); however, after five years regular withdrawals are allowed. Withdrawals during the five-year restriction period are limited to premium/ contributions made plus 5% compound interest per annum.

Benefits after end of restriction period

  • After the end of the five-year restriction period, being able to make regular withdrawals can have tax benefits. If an investor is making regular withdrawals from the Access policy to supplement their annuity income, the annuity income can be reduced.  A reduction in annuity income, which is subject to tax at the investor’s marginal rate, will result in a reduction of the investor’s income tax liability. Withdrawals from the Access policy are treated as capital reductions and thus are not subject to income tax, but subject to CGT.

On death 

  • No CGT, where policy is transferred to a nominated beneficiary. No executor’s fees where a beneficiary is nominated. Policyholder proceeds are transferable directly to the nominated beneficiaries and therefore are not trapped as part of the frozen assets in the deceased’s estate.  Estate duty may be applicable.

Asset allocation within this investment

  • No limitation on local or offshore exposure. Every investor’s risk tolerance will determine the overall asset allocation.
  • This investment is also available for direct offshore investments.

To summarise key advantages,

  • Tax on interest for wealthy individuals only 30%.
  • CGT reduced from 18% to 12% for individuals.
  • Tax on interest for Trusts are only 30% (saving of 15%).
  • CGT reduced from 36% to 12% for individuals (saving of 24%).
  • No executor’s fees for individuals (saving of up to 3.5%).
  • Liquidity is available for unforeseen circumstances.
  • Full liquidity after five years but retaining the tax advantages.
  • No limits on asset allocation.
  • The sooner any wealthy individual or Trust invest in such a vehicle – the bigger the advantage and saving over time, irrespective of the underlying asset allocation.

If we assume starting capital of roughly R5 million invested in a balanced portfolio and 20% of returns are of income nature and the balance is of capital nature – investing in such a vehicle could have a difference of roughly R2 million or more after ten years.

The biggest threat today consists of two things; thanks to medical advancements people are living longer, and inflation. Add tax to the equation and without proper planning, one could be faced with insufficient capital at retirement. Therefore, get rid of bad debt, invest in tax efficient investments that will provide income for prolonged periods of time, and create liquidity for unforeseen invents. Trusts and wealthy investors should consider tax efficient vehicles and lastly, if you are lucky enough to afford it, take as much of your investments offshore. It is a bit naïve in view of the ongoing political uncertainty in SA, and an economy that consists of less than 1% of the world economy to have all your investments in SA. Life is not all about investments, but make sure you have a plan, stick to it and enjoy the ride.

Read also: Practical advice for wealth creation – 8 tips

All investors have different objectives, income needs and circumstances. Speak to a qualified Financial Planner to assist reducing tax, using any of the investments mentioned above where applicable.

Lastly, do remember this famous quote by Benjamin Franklin: “In this world, nothing can be said to be certain, except death and taxes.” Although true, the uncertainty of regular tax changes and increases could have a severe impact on personal wealth.

  • Johan Burger, CFP® Professional and Director, Brenthurst Wealth.
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