Why is this important?
"The most powerful force in investing is compounding. If you are able to compound off a larger base through paying less tax or paying tax later, or you are able to compound for a longer period of time by investing as early as possible, this has a formidable impact on the returns generated over time."
https://www.moneyweb.co.za/mymoney/moneyweb-tax/a-value-investors-guide-to-tax-efficient-investments/Below is a summary of the options I've found so far.
[1] TFSA - Tax Free Savings Accounthttp://www.sars.gov.za/TaxTypes/PIT/Pages/Tax%20Free%20Investments.aspxInvest up to R33K per year (after tax money) for up to R500K total (lifetime limit).
You can have one account for yourself, one for your wife & one for each of your minor children.
Good for REITS & Dividend Stocks because all income (and withdrawals!) remains tax free within this vehicle.
Note that dividends are still taxed for overseas companies, so probably better to focus on local ETFs (for maximum tax avoidance benefit).
Most cost efficient TFSA platform seems to be ABSA.
[2] Retirement Annuity (RA)You may deduct up to 27,5% of your gross remuneration or taxable income (whichever is the higher) in respect of your total contributions to a pension, provident or retirement annuity fund, subject to an annual limit of R350 000.
Any growth on the capital value of your unit trust based retirement annuity fund is currently tax free in South Africa. No local dividend tax or tax on interest is charged to retirement annuity accounts.
You cannot touch the money till retirement, with minimum age 55 years.
When retiring, you’re only allowed to withdraw up to one-third of your total balance of your retirement fund as a lump sum payment, and the rest must be used to purchase a monthly annuity, such as a pension fund.
There are some exceptions to the withdrawal limit, read under 'What About Withdrawing Retirement Funds?' here:
https://www.taxtim.com/za/blog/retirement-funds-tax-laws-effective-1-march-2016---how-sars-new-changes-affect-you-Once you invest your RA proceeds into a Living Annuity you are compelled to draw 2.5% annually.
Good for REITS & Dividend Stocks because all income (NOT withdrawals!) remains tax free within this vehicle.
Note that dividends are still taxed for overseas companies, so probably better to focus on local ETFs (for maximum tax avoidance benefit).
Most cost efficient RA platform seems to be ABSA.
[3] Company VS Individual TaxIf you are a business owner then consider: "At lower levels of taxable income, it’s far more tax efficient to operate as a sole proprietor and enjoy the benefits of sliding tax tables and rebates available to individuals. At higher income brackets, it’s likely that company registration would be more beneficial."
https://www.taxtim.com/za/blog/sole-proprietor-or-company-whats-best-for-taxIf your company income is high, you can limit the amount of personal tax you pay by keeping your salary in the lowest possible tax bracket.
Then you can keep investing your profits within the company to avoid dividend withholding tax, thereby capping your company tax at 28%. This idea is explained in more detail here:
http://www.rollingalpha.com/2017/02/27/dividend-withholding-tax-the-cost/So if your income (salary + investment) is high enough, it makes sense to open a company for investment purposes only.
If you are already running a business, or have an idea to start/buy a business, then the same business entity can be used for both (operational business + investment activity).
In Summary: assuming your income is high enough, you should never need to pay more than 28% tax personally, or via your company as long as you keep reinvesting the profits within the company for retirement.
[4] Low Tax JurisdictionsOnce you retire, then move to a country that does not tax foreign income & also has a double-tax agreement with South Africa.
So you can continue to pay yourself a (high) salary from company income & profits without incurring any salary tax or dividend withholding tax in South Africa (because its a salary).
A list of countries that have a double-tax agreement with South Africa:
http://www.sars.gov.za/Legal/International-Treaties-Agreements/DTA-Protocols/Pages/DTAs-and-Protocols-(Rest-of-the-World).aspxA good example is Malta Global Residence Programme (MGRP):
- Flat fee annual taxation of €15,000 (pay no tax on worldwide income, no CGT paid on gains arising outside Malta and received in Malta)
- Property requirement annual rental €9,600, or a minimum purchase of €275,000 in Malta
- Property requirement annual rental €8,750, or a minimum purchase of €220,000 in Gozo and the Southern Region of Malta
- Donation of €6,000 + processing fees
- No residency requirement (No requirement to live or spend any time in Malta, just cannot spend more than 182 days anywhere else because then you would become tax resident in that country)
- Medical insurance required
- You get a Schengen VISA that allows free travel in Europe:
https://www.schengenvisainfo.com/schengen-visa-countries-list/NOTE: there are no other costs or fees involved (because you are not buying a passport, this option does exist but at greater expense)
More info here:
https://www.ccmalta.com/publications/malta-global-residence-programmeSome of these figures might sound high, but this is a workable plan that you can set your sights on.
[5] Bonus Option: Bitcoin / CryptocurrencyMove some funds (up to ~5% depending on risk tolerance) into crypto as a form of insurance.
Bitcoin can be seen as a currency, but can be purchased on a local exchange like Luno without triggering your offshore allowance.
Bitcoin is increasingly being used as currency with ATMs all over the world (including Malta).
And unless you convert the Bitcoin back into ZAR, it remains untouched by SARS.
What are your thoughts?
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