What does the “tax-free” part of tax-free savings mean?

 

When you make an investment, you’re hoping for a return (obviously). You want your investment to grow, you want dividend pay-outs … in short, you want to build your personal wealth. But at what cost?

“Any benefit you gain from an investment, be it interest, capital gains, or dividends is subject to tax when you cash it in,” explains Almero Oosthuizen of EasyEquities. “So if you invest R1,000 now, and your investment is worth R4,500 when you withdraw it in 10 years, you will be taxed on the difference – that’s the R3,500 – in the year that you make the withdrawal.”

When you make your investment you don’t know what the tax rate is going to be when you withdraw. So let’s say you’re paying a nominal tax rate of R25% when you cash in your investment. That means you’ll pay 25% of your R3,500 profit, which is R875. So you’ll clear R2,625.

“Remember, your initial R1,000 investment was made after tax. It’s just the money you’ve earned on the R1,000 that’s subject to tax,” explains Almero.

Now consider a R2 500 investment per month over 16 years = R480 000. We’ll assume an annual return of 15%, which is roughly what we used in the above example, and a nominal tax rate of 25% when you cash in.

In 16 years your investment will be worth R1,996,733, which means it will have grown by R1,516,733.

If you were taxed on this amount at 25%, you’d have to fork over R379,183 to SARS.

“It makes a massive difference when you look at the numbers,” says Almero. “And that’s just considering capital gains. When you throw dividends into the mix, that number is a lot higher.”

Almero warns of the dangers of paying high fees.

“In the same way that compound interest makes a huge positive difference to your savings, high broker fees can make a big dent in your investments over 16 years. Be sure to choose the platform that offers the lowest cost of investment in the market.”

EasyEquities offers the best tax-free investment option in South Africa – no upfront costs, no minimum investment, no monthly fees, fractional share rights and an easy-to-use web-based platform to transact on. 

It’s a no-brainer, really. What are you waiting for?

Visit our website for more info and to start your tax-free portfolio today.