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Pay off your bond before thinking about investmentsState pension AFTER 15 years of working for the state, I have left to enter the private sector and should be paid out about R250 000 for pension contributions. Are there any restrictions or tax implications for me? I have a fairly large bond of R500 000 which I can pay monthly from my new salary. Do I pay the money into the bond or invest it offshore, as I believe the rand will continue to fall?
Derek Sumption of Gauteng-based Brantam Financial Services replies: The simple answer to your first question on tax implications is that your pension money accumulated before March this year will be tax-free, but the pension fund contributions you have made since March will be taxed. Up until March, state pension payouts were tax-free, meaning they were never subjected to the R120 000 tax-free facility which applies to private pension funds. However, these state pension funds are now treated in exactly the same way as private-sector pension funds. Also, a fairly complicated formula is now applied to state pension payouts. It is worth your while to find out whether you are receiving only your contributions or those made by the employer as well. It has become practice for public sector pension funds to pay out the total value if the funds are to be transferred to a registered retirement annuity fund. Also, the amount transferred to the retirement annuity will remain tax-free and only the subsequent growth will be taxed at retirement. But, should you decide to draw your pension money, it would make absolute sense to pay this into your bond. There is one proviso - you must continue paying the same bond repayment you are paying now. If you reduce your repayments to match the lower bond, you will have achieved nothing other than to improve your cash flow and, in all likelihood, you will end up spending the extra income. Once your bond is paid off, you should invest what you were paying on the bond in some sort of growth asset. You should not invest overseas purely because the rand is dropping, as this is only one part of the equation. The other consideration should be what sort of returns you can expect from your international investment versus your expected returns in the local market. For example, a cash deposit in the UK is currently paying approximately 4% per annum. A cash deposit in South Africa is paying about 14%. Therefore, the rand must depreciate by 10% per annum for you to break even. If the rand were to depreciate by 15% a year, you would be making 5% on your money. If it were to depreciate by 5% per year, you would be losing 5% in relation to your local investments. Therefore, in the final analysis, I would recommend that you invest between 15% and 20% of your funds offshore, not so much for the return but for the diversification.
Am I a dealer? MY QUERY revolves around section 11 of the Income Tax Act - the buying and selling of shares. Last year, I traded probably six times, and on some shares I made a profit and on some a loss. The overall effect was a small profit. My total portfolio is about R70 000 and my trading is really a hobby. My question is how I complete my tax return form in such a way so as not to be declared a trader. The obvious method is not to say anything but that is tax evasion which I'm not prepared to do. Also, do South Africans have to pay income tax on capital gains from the sale of unit trusts? I bought unit trusts at R1 and am now selling them for R3. Do I pay tax on the R2 profit per share?
Tony Davey, group lawyer for Fedsure Holdings, replies: If your intention is to speculate, then you will be regarded as a share dealer, in which event your gains are of a revenue nature and included in your gross income. Conversely, losses are deductible. If your intention is to buy and hold for the medium to long term and sell only out of necessity (for example, to buy a house or car), then the gains will be of a capital nature and free from income tax. Aside from the above general principles, section 9B of the Income Tax Act states, in essence, that shares held for a continuous period of five years are deemed to be of a capital nature if the taxpayer so elects. This means that gains are tax-free, but losses are not deductible. Section 9B does not, however, override the general principles stated above, although it introduces certainty for shares you have held for at least five years. An explanation on your tax return such as "long-term investment" or "investment for retirement/domestic purposes" would indicate clearly that you have a capital as opposed to a revenue intention. Given the amounts involved, the fact that this is more of a hobby than a profession, and the limited number of share dealings, I would consider you unfortunate to be deemed a dealer. In response to the second question, South Africa does not have a capital gains tax. From an income tax perspective, the appreciation in units is a capital gain (as opposed to a revenue gain) and hence tax-free.
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