The end of the tax year is almost upon us. At this time many financial commentators urge people to put extra savings into their retirement annuity funds and tax-free savings accounts to take full advantage of the tax concessions on these products.
This column looks at two other things you should consider before the end of February: your annual donations tax and annual capital gains tax (CGT) exemptions.
Taking advantage of these exemptions may be especially beneficial this year, as Finance Minister Enoch Godongwana may decide to make changes to them in his Budget speech next week, and the changes are not likely to be in your favour.
Donations tax
Donations tax is paid by the donor on donations to anyone other than the donor’s spouse or an approved public benefit organisation. There is a R100 000 exemption on total donations made during the tax year; thereafter you pay 20% on amounts up to R30 million and 25% on anything above that.
Let’s say you give your son R150 000 to kickstart his investments, and it is the only donation you make in the tax year. You will have to pay the taxman 20% of the amount over R100 000, which is 20% of R50 000, or R10 000.
To avoid paying the R10 000, you could split your donation over two tax years, and now is the ideal time to do that. You could give him R100 000 before February 29 and the remaining R50 000 on or after March 1. And you’ll still have another R50 000 to give away tax-free.
The government has, sneakily and unjustifiably to my mind, extracted more from taxpayers each year over many years by not upping this exemption in line with inflation. (This also applies to other tax thresholds, exemptions and exclusions - see below.) The donations tax exemption has remained R100 000 since at least 2008, by my records. According to Statistics South Africa, the Consumer Price Index was 52.4 points in December 2008 and 112.7 points in December 2023. If it had kept pace with inflation, you would now enjoy an annual donations exemption of R215 000. Put another way, R100 000 is worth less than half its 2008 value.
Capital gains tax
CGT is triggered on the sale of an asset: the gain is the difference between what you paid for the asset (plus any associated expenses) and what you sold it for. You are required to include a portion of the gain, as determined by Sars, in your taxable income for the year.
A common trigger is when you switch investments on an investment platform - for instance, from a higher-risk equity fund into a lower-risk multi-asset fund. There are two factors that come into play: the exclusion amount and the inclusion rate (yes, it’s complicated).
The current exclusion for individuals is R40 000 and the inclusion rate (the percentage of the gain included in your annual taxable income) is 40%. You first subtract R40 000 from the gain and then you apply the 40% rate.
Let’s say you have invested R200 000 in a certain unit trust fund and the capital value of your investment now stands at R300 000. If you switch the entire amount to another fund, your gain of R100 000 will be realised and a CGT event triggered. Subtracting the R40 000 exclusion brings you to R60 000. Of that amount, 40%, or R24 000, must be added to your taxable income for the year and will be taxed according to the Sars income tax tables.
However, if you stagger the switch, by moving R150 000 before February 29 and the balance of R150 000 after that date, your taxable gain for this tax year will be (R50 000 - R40 000) x 40%, or R4 000. If Minister Godongwana leaves the exclusion amount and inclusion rate the same, your taxable gain for next year will be another R4 000.
As with the donations exemption, National Treasury has not systematically adjusted for inflation over the years, although there have been sporadic jumps in the thresholds since CGT was introduced in 2001.
In 2001, the exclusion was R10 000 and the inclusion rate 25% for individuals. A capital gain of up to R1 million on a primary residence was tax-free.
By the 2014 tax year, the exclusion was R30 000 and the inclusion rate 33.3% for individuals. The tax-free threshold on a primary property had increased to R2 million.
A decade on, the figures are R40 000 and 40%. The primary property threshold is still R2 million.
The one area in which the ruling party can hope to increase revenue and not detrimentally affect its poll ratings is by upping taxes on investments. Just putting it out there…
* Hesse is the former content editor of Personal Finance.
PERSONAL FINANCE