Investment strategies to reduce tax

Posted in Communication   |   March 17th, 2020

All investors seek to optimize their investment returns and reduce tax.

Generally, lower risk portfolios are overweight in interest-bearing investments which attract income tax whilst high-risk portfolios have an overweight investment in shares attracting capital gains tax and dividend tax. The income tax act provides for certain tax exemptions for interest- and capital gains earned by natural people. In addition to the exemptions, retirement funds qualify for deductions within certain limits of contributions made.

The first step in planning an effective investment portfolio is to finely balance the investments to maximise the exemptions and deductions and rebates offered under the income tax act. These exemptions, deductions and rebates should be maximised between husband and wife.

The following example illustrates a well balanced portfolio maximizing all deductions, exemptions and rebates offered under the income tax act.

The example is based on the following;

Notes;

‘* We assume the capital gain is R 120 000 each

‘** We assume the husband being the main member contributes R 45 000 p.a. to their medical scheme

Tax Payable per income stream

Summary

In the example the couple invested a total of R 5,900,000 (R 2,950,000 x 2) and earned a total annual income of R 323000 and had a capital gain of R 120000 on investments made.  The tax payable by husband and wife is only R 5346 each.

Additional tax saving strategies could be to contribute R 1000 pm each to a Retirement Annuity scheme that adds a tax deduction to the above.  

In constructing a well balanced investment portfolio, attention should be given to maximising all tax savings opportunities in products and structures.