CAPE TOWN - Not all sources of income are taxed in the same way. The interest income that you earn in a savings account, for example, is taxed differently to dividend income you earn as a shareholder in a company.
As an investor and taxpayer, you should manage your investments and tax affairs in such a way that you maximise your returns while limiting your tax expenditure. This is according to Floris Slabbert, director at Ecsponent Financial Services, who believes that a financial adviser will be able to guide you through this process. However, he says that "if you find yourself a little overwhelmed and need clarity, it helps if you understand some of the key terms and percentages to get you back on track”.
“Investors in shares, such as those listed on the JSE, can earn an income from the dividends declared by the company in which the shares are held. Before paying the dividend, tax legislation requires the company to deduct dividend withholding tax of 20%. The company pays this tax to the South African Revenue Service (Sars) on your behalf. For example, if the dividend declared is R100, you will receive R80 and Sars R20. You will have to report the gross dividend earned when filing your returns,” Slabbert says.
“Generally, the interest a South African resident and taxpayer earns in a savings or investment account is included in the calculation of your taxable income. However, the first R23 800 you earn as interest is exempt from tax. If you are older than 65, a secondary rebate is applied, which then increases the total rebate to R34 500. It is worth noting that this rebate amount has remained unchanged since 2014," Slabbert says.
Which is better: interest or dividends? It depends on each investor’s financial and taxable income position and there is no one-size-fits-all answer, Slabbert says. However, it is an important question to explore with your financial adviser.