When most people hear the word ‘tax’, their immediate reaction is a negative one. Paying tax is certainly not a pleasurable exercise but it must be done. With careful planning, there are ways to go about managing your tax bill when you need to draw on your discretionary investments. Duann Cronje, Certified Financial Planner at Fiscal Private Client Services explains how.
One such management tool used in financial planning is to maximise the full benefit of your Capital gains tax (CGT) exclusion on an annual basis. We advise our clients to use their full exemption on an annual basis because if it is not used, it is lost.
The South African Revenue Services (SARS) website reads, “A capital gain arises when you dispose of an asset on or after 01 October 2001 for proceeds that exceed its base cost. All capital gains and capital losses made on the disposal of assets are subject to CGT unless excluded by specific provisions.
An annual exclusion explained:
Cronje explains that for each year of assessment, an annual amount of “R40 000 (referred to as the “annual exclusion”) of the sum of your capital gains and losses is excluded for CGT purposes. The annual exclusion increases in the year in which a person dies to R300 000.”
He illustrates how to calculate the amount:
When the numbers speak for themselves:
Using an example, Peter is an 80-year-old pensioner who earns R10,000 p.m. from his pension and has R2,000,000 invested in a Linked Investment. He earns no other income and has no other assets. If we assume that Peter needs an additional R5 000 p.m. to cover his now increased monthly expenses, he will need to withdraw R60 000 from his investments in the current tax year.
The table below shows the possible amounts Peter can withdraw from his investment, dependent on how large the capital gain is as a percentage of the withdrawal amount, to ensure he pays zero rand in CGT. We assume he has his full R40 000 exclusion available.
If we assume that Peter has a 70% capital gain amount on his withdrawals, he could draw R57 143 without incurring capital gains tax. This would be close to covering the R5 000 p.m. he needs for the full year. Importantly, he could access his discretionary funds with minimal to zero CGT implications, dependent on the amount he wishes to withdraw.
The annual allowance can be used for many reasons, but in this article, we focus solely on using the exclusion to supplement your income. If we were to adjust the amount that Peter needs to withdraw (for an unplanned emergency as an example) and assume that he has a 70% capital gain percentage, the below table shows estimates for his CGT bill:
Based on the table above, If Peter wants to draw R200 000 he could incur a CGT bill of roughly R7 200. Simply put, this means he receives a net amount of R192 800. This could cover his R5 000 p.m. (R60 000 p.a.) income need, as well as a further R132 800 to cover any emergency needs that may arise in this tax year, costing him only R7 200 in CGT. This is a great tool to use in managing your tax bill if you need to withdraw from your discretionary investments.
It is clear that the lower your gain is on your investment value, the more you can withdraw without high CGT implications. Some actions that will affect your gain on your investments include, but are not limited to, adding to your investments, drawing from your investments, switching from one fund to another, selling out of your fund to move to a different platform, paying fees on your investment, moving to a different investment vehicle and of course, investment returns.
