The taxing issues of retirement

For the 2012/13 tax year the interest income exemption is R22800 for those under 65 years old and R33000 for those over 65.

A new regime due to be implemented on March 1 2013 will grant an exemption of R30000 per annum on all investment income, not only interest. The nitty gritty will only be known when the draft tax bill is made available in June. But we do know that SARS intends to cap the use of the exemption at R500000 per taxpayer in a lifetime.

Presumably the meter will only start running on the cap from the 2014 year of assessment. Otherwise there will be a mad scramble for past tax returns to ascertain what has been utilised to date. So nobody is going to hurt for some time to come.

Investment income exemptions are intended to encourage the taxpayer to accumulate savings through a lifetime and shield pensioners from tax in retirement.

The R30000 p/a capital gains tax exemption provides some additional relief. Thereafter CGT can be levied at a maximum 13.33%. Dividend income is stunted by dividends tax at 15% flat rate. Thus the benefit of allowing these forms of income to be offset against the general income exemption could actually hurt the taxpayer if the exemption could be used later to shield interest income that can be taxed at 40%.

A R500000 lifetime exemption sounds generous. But it will only buy a pension of R3000 a month, maybe less.

Perhaps a compromise is needed. How about the suggestion that the R500000 cap will no longer apply after age 65? That way at least the pensioner is safe. The over-65 taxpayer will then be guaranteed a tax threshold of R99058, plus a R30000 annual interest exemption, plus a R30000 CGT exemption – an effective potential tax threshold of R159058. And those over 75 will get R170889.

The solution is at hand – save through a retirement annuity. That way all income on the investment is shielded from tax until retirement, without using up the exemptions. And the investment will be tax deductible.

But the problem is broader. Banks are proudly offering interest rates at around 5.5%, when inflation is over 6%. They are advertising to make investors poorer, before any tax is levied.

We can only switch to equities and pray.

Originally published in the Sunday Times Tax Talk column.


Showing 3 Comments »

  1. “A new regime due to be implemented on March 1 2013 will grant an exemption of R30000 per annum on all investment income”

    Is this true?

    Or should it read all South African investment income?

    I believe interest from overseas is excluded.

    I hope that I am wrong.

    Comment by Ian16th — 15 April 2012 @ 10:29 am

  2. What is meant by “investment income” I am 72 years of age. My income is by way of a living annuity, drawings from balanced fund type unit trusts comprising interest, dividends and capital, interest from listed property shares, dividends and income from an investment property.

    The living annuity will be fully taxable and take up the tax threshold of R99058. Do I then lump together the balance of the income and deduct the R30,000 plus any CGT up to the R30,000 limit. Or can I still claim the interest allowance presently at R33,000 and leave out the dividends which have already been taxed at 15%.

    Further I believe I am going to lose out substantially on medical aid contributions and costs. Can you also comment on this aspect.

    Comment by Paul McCreadie — 16 April 2012 @ 1:57 pm

  3. Does Mr. Lester ever respond to comments?

    Comment by Ian — 20 April 2012 @ 9:21 pm

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