4 Ways The Tax Man Punishes Your Investments, And What You Need To Do About It
The tax man wants your money.
Not all of it, but he wants his piece of your investment pie.
And there are four specific ways he goes about taking his pound of profit flesh from you.
Is there anything you can do about it?
Damn straight there is!
That’s why today I want to show you exactly how the tax man pilfers your profits, and how you can pay less tax…
Simply read on for more.
REVEALED: How The Tax Man Takes His Pound of Flesh
While some of the fees you will incur in your investing journey can be negotiated, and some providers will charge less than others, the government is also standing in line to earn its share of your investments!
This comes in the form of investment taxes.
The most common taxes that you will likely come across in terms of investing and trading are:
- Capital Gains Taxes
- Income Tax
- Dividend With Holding Tax
- Securities Transfer Tax
Looks look into these a little closer…
Tax #1: Capital Gains Taxes (CGT)
When you exit an investment with more money than you entered, you have earned what’s called a capital gain.
The government taxes you on these gains.
The good news is that you only pay the tax when you exit the investment and actually realise the gains.
Depending on what tax bracket you fall into, CGT rates have a maximum of 16.4%.
SARS also allows you R40,000 per year in tax free capital gains so you’ll only have to pay CGT if you’re realising returns greater than R40,000
SMART Tip: Gains are only considered of a capital nature if you hold the investment for three years or longer. If you keep investments for less than three years, they can be considered as short term trading investments.
Tax #2: Income Tax
If you’re a trader and hold investments for a short period of time (less than 3 years) then SARS will not tax you using CGT rates, like above, but rather your gains will be taxed as income.
Income tax rates are much higher than CGT rates.
So remember, the term of your investments can have implications on the tax you’ll pay!
Tax #3: Dividend Withholding Tax (DWT)
When companies distribute profits to shareholders, it’s known as a dividend.
Now this distribution of profit is another taxable event.
15% of dividends that come your way are withheld due to DWT.
SMART Tip: Dividends declared by Real Estate Investment Trusts (REITS – listed property companies) are not seen as dividends so are not subject to DWT but are taxed as income.
Tax #4: Securities Transfer Tax
Whenever you purchase shares in a company, the transfer of those shares is subject to a transfer tax of 0.25% of the value of your transaction.
How To Pay Less Tax
(And Keep The Governments Dirty Fingers Off Your Investments)
They say the only certainty in life is death and taxes.
Now after learning about all the fees and taxes involved in investing I don’t want you to start thinking your investments are doomed before they’ve even started.
Fees and taxes are part of the game in investing, there’s no way around them.
However, the key is to know when costs look unreasonable and to manage your investments in a tax and fee efficient manner.
And that’s why I have some great news for you!
In March 2015 the government introduced Tax Free Savings Accounts (TFSA).
That means that in no shape or form will this account ever pay any tax!
The returns in the account are 100% yours!
SMART Tip: You can only contribute R30,000 to your TFSA each year, and R500,000 over your lifetime. But remember the proceeds of this account will never be taxed. So if you invest this money for 10 years and more, we’re talking about some huge tax savings!
If you want to find out more about Tax Free Savings Accounts, simply click here for more.
Until then, here’s to SMART investing.
Analyst, The SMART Investor
The Money Lab