Author Topic: Your Best Tax Efficient Investment Strategies?  (Read 7404 times)

nicnacs07

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Your Best Tax Efficient Investment Strategies?
« on: October 19, 2017, 10:25:29 am »
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 Account
http://www.sars.gov.za/TaxTypes/PIT/Pages/Tax%20Free%20Investments.aspx

Invest 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 Tax

If 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-tax

If 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 Jurisdictions

Once 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).aspx

A 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-programme

Some of these figures might sound high, but this is a workable plan that you can set your sights on.

[5] Bonus Option: Bitcoin  / Cryptocurrency

Move 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?
« Last Edit: October 19, 2017, 01:51:23 pm by nicnacs07 »

gcr

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Re: Your Most Tax Efficient Investment Ideas?
« Reply #1 on: October 19, 2017, 10:49:18 am »
Some countries (I think Malta may be one) normally want you to introduce a qualifying amount of funds into their country by way of purchasing a home and buying a passport.
Also to my mind having suffered under old RA's they are a dead loss. Also on the downside once you invest your RA proceeds into a Living Annuity you are compelled to draw 2.5% annually - which in my case doesn't suit me as I want the capital to grow and earmarked the funds for when I turn 80 in 10 years time.
Also trying to minimize tax may place you in a country that you may personally not have an affinity with when you do retire and put all these tax tricks into place
To my mind this whole question of tax avoidance needs to be looked at more deeply and maybe talk to those forumites who have emigrated/work in off shore countries but earn funds here and abroad to bring some reality to the whole question of being a worldly person - an international nomad if you like 
Not everything that counts, can be counted, and, not everything that can be counted counts - Albert Einstein

Orca

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Re: Your Most Tax Efficient Investment Ideas?
« Reply #2 on: October 19, 2017, 12:39:18 pm »
If you are non SA resident then you cannot have a TFSA. Company held or individually. Tradehold vs SARS closed that loophole.
I started here with nothing and still have most of it left.

basilspanellis

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Re: Your Most Tax Efficient Investment Ideas?
« Reply #3 on: October 19, 2017, 01:06:56 pm »
@nicnacs07,

Have you guys heard of the Tax free Hollard Endowment via Anchor Capital?

Please below video link on the structure...

http://www.anchorcapital.co.za/article-full#2589

Let me know if you have any questions.

nicnacs07

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Re: Your Most Tax Efficient Investment Ideas?
« Reply #4 on: October 19, 2017, 01:07:27 pm »
Thanks @gcr, made some updates to my original post based on your comments.

I think the new format RAs make sense assuming that you are making a significant tax saving & young enough to really take advantage of the compounding benefits.

This article might be useful: https://www.moneyweb.co.za/mymoney/moneyweb-tax/a-value-investors-guide-to-tax-efficient-investments/

Summary of tax-efficient priorities given age and stage


Regarding affinity and having a home base, I think this largely comes down to your mindset (which may be heavily influenced by where your friends & family live).

So yes, if you are comfortable with being a citizen of the world then this plan could work well for you.

My situation is fairly unique in that I earn my living online, and so can relocate anywhere I choose without having to find a job there.

@Orca, I guess my post is aimed at those still based in South Africa, but who might want to relocate later (i.e. when kids leave the house) to take advantage of the tax benefits.

If you build up TFSA while living in SA, then SARS cannot take those funds from you when you leave.

You just won't be able to continue contributing or expecting the same benefit, so you would need to withdraw the funds from the TFSA and then invest the money elsewhere.

As far as I know the RA keeps the same rules, just you would stop contributing once you leave (because you moved to a low tax jurisdiction).

Just putting my thoughts out there - please correct me if you think anything I said is incorrect.

« Last Edit: October 19, 2017, 01:30:36 pm by nicnacs07 »