Any benefit you gain or profit you make from an investment, whether through interest earned, profit on the growth of your investment, or dividends that have been paid to you, is subject to tax. While there are ways to invest tax free, such as in a tax free savings account (TFSA) or a retirement annuity (RA), here’s a breakdown of the different kinds of taxes you would pay when you invest in a regular investment account:
Tax on interest
If you make a deposit into your investment account and you don’t invest this cash, it will earn interest the same way that it would in a regular bank account. You would also earn interest on cash which forms part of a managed portfolio (bundle), should this be part of the managers strategy. Learn more about interest rates on EasyEquities here.
When you complete your tax return, you’ll pay tax on this interest at a rate which is based on your personal income tax rate. If, for example, you pay 20% tax, you’ll be taxed 20% on the interest earned from the cash portion of your investment account.
If you’re under the age of 65 you qualify for an exemption up to an amount of R23 800 of interest. If you are over 65, this exemption amount is R34 500.
Tax on dividends
When a company you own shares in pays out dividends, 20% of this amount is paid to SARS immediately on your behalf and there is an automatic record created showing that you have paid the tax that is due. This is called dividend withholding tax and happens regardless of whether you’ve reinvested that dividend pay-out, left it in cash, used it to invest in another share or withdrawn it.
In a tax free savings account, even though you won't pay dividend withholding tax on local exchange traded funds (ETFs), you'll notice that there are some international ETFs that you do pay tax on. This is because in the case of a dividend paid by a dual listed company, where the dividends tax is withheld by the foreign company paying the dividend, those dividends are not exempt from the dividends tax associated with them and will be deducted from your TFSA account. The good news is that EasyEquities take care of that on your behalf as well.
Tax on capital gains
This kind of tax is only applied when you sell an investment that has grown and produced a profit. In other words, you are paying tax on the gain or growth of that investment. Let's say you were to invest R100 into a share and after 5 years your investment was worth R150. If you then decided to sell your investment into that share and then either withdraw your money, leave it as cash in your account or use it to invest in another share, the R50 profit you had made would be subject to tax.
However there is an exemption on amounts up to R40 000 per year for capital gains tax, and then only 40% of the remaining capital gains tax, if any, is added to your other taxable income. The rate that you are charged for capital gains tax on the 40% left over after the exemption is based on your personal tax rate and so is different from person to person.
VAT and Securities Transfer Tax (STT)
You'll notice that when you look at the cost breakdown on any of your EasyEquities transactions, that there is an amount charged for VAT as well as something called Securities Transfer Tax.
Value-added Tax on Costs (VAT) is 15% and is charged on the brokerage, settlement and administration amount & investor protection levy.
Securities transfer tax is levied by SARS at 0.25% of the nominal value of any purchases of shares but is not charged on the purchase of ETF’s as they are excluded from this charge. In respect of fractional securities, EasyEquities charges a similar administration fee so that once you have accumulated a whole share we would then pay this amount on your behalf. In a TFSA, this charge generally does not apply as ETF’s are excluded from securities transfer tax.
When you do your tax return, the guys at SARS will need some tax certificates from you. These are your IT3B and IT3C certificates which tell SARS how much money you’ve earned from your investments. You can find these statements under the EasyEquities menu, under 'Statements'.