Dividends tax, introduced in March 2015 at 15percent of the dividends paid, was increased to 20percent with effect from Wednesday.
The best way to avoid this tax is to increase your contributions to your retirement fund: not only are these contributions tax-deductible, but they are also exempt from dividends tax, income tax on interest and capital gains tax (CGT).
At a budget presentation hosted by the South African Institute of Tax Practitioners and the Financial Planning Institute this week, Ronald King, the head of strategic research and support at PSG, says even if high-income earners contribute more than they are allowed to claim as a tax deduction, they can effectively make an “interest-free loan” to the living annuity from which they will withdraw an income in retirement. This is because contributions within and beyond the tax-deductible limit earn interest-free growth. The limit on contributions that qualify for a tax deduction is 27.5percent of the greater of remuneration or taxable income, capped at R350000 a year.
You can also avoid dividends tax by investing through a tax-free savings account. Contributions to these accounts are not tax-deductible, but the growth on your savings is free of dividends tax, income tax and CGT.
Gordhan announced an increase in the annual contribution limit to tax-free savings accounts, from R30000 to R33000 a year. However, the annual lifetime limit of R500000 was not changed.
Seugnet de Villiers, an investment analyst at Nedgroup Investments, says the growth on your tax-free investment portfolio is boosted throughout your investment timeframe, because it is subject to zero tax on dividends earned (instead of the new rate of 20percent), zero tax on interest income earned (instead of your marginal tax rate on interest earned above the annual interest exemption, which remains unchanged for the new tax-year) and zero tax on capital gains realised at withdrawal (instead of up to 18percent on gains above the annual exemption of R40000).
Cheryl Howard, an independent financial planner and the managing director of Talaria Wealth, told the presentation that endowment policies are also a good option for high-income earners.
National Treasury this week introduced a marginal tax bracket for the super-wealthy: people who earn above R1.5million a year will be taxed subject to a top marginal rate of 45percent. Taxpayers who earn less than this but more than R708311 will be subject to a marginal rate of 41percent.
On investments in endowment policies, the life assurance company pays tax at 30percent on your behalf. These policies can be advantageous for anyone whose tax rate exceeds 30percent.
King says that investing in an endowment policy can also be advantageous for investors whose assets are held in a trust, because trusts will now pay income tax at a rate of 45percent, and the CGT rate for trusts is 36percent.
Howard says the disadvantage of using an endowment is that your money is locked in for five years.
The Budget Review states that if the top marginal tax rate had been increased without increasing dividends tax, there would be more opportunity for people, particularly the self-employed, to engage in tax arbitrage by paying themselves dividends instead of a salary.
The tax rate on foreign dividends will be adjusted in line with the new rate for local dividends.
The CGT inclusion rate and the CGT exemptions were left unchanged, but the effective CGT rates for taxpayers on the highest marginal tax rate of 45percent will increase from 16.4 to 18percent.
Bruce Russell, an associate director at Grant Thornton Cape, says the increase in the rate of dividends tax may require some shareholders to rethink the way in which they sell their investments.
Previously, the maximum effective CGT rate of 16.4percent, as against the dividends tax rate of 15percent might have encouraged shareholders to secure their exit via a share buy-back, which avoids dividends tax. But with the new marginal tax rate of 45percent for individuals with a taxable income of over R1.5million, the highest effective CGT rate for individuals is marginally lower, at 18percent, than the new dividends tax rate of 20percent, he says.
Russell says that shareholders disposing of shares by way of share buy-backs should consider concluding these arrangements before the end of February, because Treasury has proposed to introduce measures that prevent the deferral of income tax where a shareholder disposes of shares by way of a share buy-back.
He says Treasury has not yet provided the date from when these anti-avoidance provisions will apply, but it would not be surprising if they started on from March 1.
BUDGET 2017 FAST FACTS: TAX RATES
• Dividends tax was increased from 15 percent to 20 percent.
• The annual limit on contributions to tax-free savings accounts was increased from R30 000 to R33 000.
• The capital gains tax (CGT) inclusion rate for individuals remains 40 percent.
• For taxpayers on the new highest marginal tax rate of 45 percent, the maximum effective CGT rate is 18 percent.
• Estate duty and donations tax remained unchanged at 20 percent.