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Picture: MOHAMED_HASSAN/PIXABAY
Picture: MOHAMED_HASSAN/PIXABAY

Question:

My question involves R3m invested in five-year fixed-deposit South African retail bonds at the current interest (10.5%), with no withdrawals but reinvested interest. I’d like to know about tax. 

The interest is (after an allowance of R34,500) added to my taxable income. So I pay tax on the interest. Happy so far!

Now I reinvest the interest, making the capital sum R3.315m. Does the interest remain at 10.5%? Not considered a new investment, the interest in the next year is R348,075, which is again added to my taxable income in the second year. But I have already paid tax on the R315,000 in the year before.

Is there an allowance with the South African Revenue Service (Sars) regarding tax in the second year and so on?

— Mike B

Answer:

The allowance mentioned is correct for those over 65. For savers under 65 the annual interest exemption is R24,800 per year.

As to the question: yes, the interest rate would remain the same, in this case 10.5%, but on a higher capital amount, as you’ve reinvested the interest, essentially adding it to the capital.

Sars does not credit you with the tax paid in the previous year on the interest received. It treats it as new interest income, which it is, and so, yes, there is a drag on the return. Further, as you reinvested the interest, you owed tax but had not received any cash flow, so you’d have to pay the tax out of other money you have.

It may well be worth speaking to a tax expert about the matter to try to reduce your interest taxation with other products — maybe even a tax-free or regulation 28 product.

— Simon Brown, Just One Lap

We’d like to hear from you. E-mail us on yourmoney@fm.co.za

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