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Finance minister Enoch Godongwana. File photo: GCIS/ELMOND JIYANE
Finance minister Enoch Godongwana. File photo: GCIS/ELMOND JIYANE

Every year in February the finance minister stands up in parliament to deliver his budget speech, and over the course of  an hour he essentially makes us all poorer as taxes, levies and surcharges increase.

But some tax breaks are available to us and we must use them to as full an extent as possible.

The first, which I wrote about last week, is the exemption on interest earned, which is R23,800 for  people under 65 and R34,500 for those who are older. The problem here is that interest is generally a poor return, so we may not want to max out this exemption unless we’re in retirement — in which case we absolutely must use the full exemption.

Investment decisions about  when to buy or sell should never be made purely for tax reasons

The other biggie is the regulation 28 tax deduction. Here you can deduct any money paid into a  regulation 28-compliant fund from your income for tax purposes. The limit is R350,000, or 27.5% of your income, whichever is smaller. So if you earn, say, R500,000 a year, you can contribute up to R137,500 into a  regulation 28 fund and reduce your taxable income to R362,500. This will potentially drop you into a lower tax bracket, so not only will you pay a lower total amount of income tax, you may also pay a lower overall rate of tax.

There is another trick here. The tax-free accounts that are limited to a R36,000 deposit per year are funded with post-tax money. In other words, the tax benefit is not for today; rather, it is for when you draw the money out. Staying with the  R500,000 annual salary, your tax for this year is about  R120,000. By putting that R137,500 into a regulation 28 fund your tax bill will drop to  about  R80,000. You’ve saved  R40,000 on tax, and this funds your tax-free contribution, in a way funded by  the SA Revenue Service.

The last tax exemption we get every year is the first R40,000 of capital gains tax, which is exempt from tax. Any capital gain on an investment over  R40,000  adds 40% of the capital gain to your income and is taxed accordingly. We must ensure that we use the full exemption every year. If you have an investment in profit that you want to sell, then this is an easy decision. But if that potential capital gain exceeds R40,000 you may decide to make the sale over two tax years and so split the capital gain, thereby receiving the exemption twice.

However, what is very important is that investment decisions  about when to buy or sell should never be made purely for tax reasons. If you have a stock you want to sell today, don’t wait until March next year to do the second half of the sale. But if you’re cleaning up your portfolio in January or February, waiting a few weeks for the second part of the sale is maybe not a bad idea. But always keep this point in mind: tax implications should never drive investment decisions. If you want to sell now, then sell now.

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