Tax Planning in South Africa
Tax planning is a proactive approach to financial management that allows you to grow wealth more effectively. Read our guide on tax planning in South Africa to learn more.
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Tax planning goes beyond just filing returns — it is an essential part of a successful financial strategy.
It can reduce your tax liability, optimise your finances and allow you to keep more of what you earn. This means taking advantage of things, such as deductions and exemptions, to reduce unnecessary tax liability.
This guide will walk you through everything you need to know about tax planning. We will look at the different types of taxes in South Africa, strategies for minimising tax and other key information.
Understanding the different types of taxes in South Africa
Understanding the different types of taxes in South Africa is the first step to effective tax planning. Here are some of the key taxes you should be aware of:
Personal income tax
Income tax applies to your earnings at a progressive rate, meaning the more you earn, the higher your income tax bracket. The South African Revenue Service (SARS) taxes the worldwide income of South African residents.
Visit the SARS website for a full breakdown of the income tax rates.
Capital gains tax (CGT)
CGT is a tax on the profit from selling an asset, such as property or investments. The current CGT tax rates are:
- Individuals - Up to 18%
- Businesses - 21.6%
- Other trusts - 36%
There is an annual exclusion of R40,000 for individuals and special trusts.
Value-added tax (VAT)
VAT applies to most goods and services. The current rate is 15%, and specific items and services are exempt.
Dividend withholding tax
Shareholders have their dividends taxed at a rate of 20% before receiving the payments. You must carefully plan dividend income for tax efficiency.
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Tax residency in South Africa explained
Your tax residency status in South Africa determines whether you're taxed on worldwide income or only on income earned locally
There are different types of residents in South Africa: those defined by the Income Tax Act 1962 and those defined by South African common law. Either an ordinary resident or physical presence test is used to determine your residency status.
South Africa taxes residents on global income with a residency-based tax system. Meanwhile, the government only taxes non-residents on South African-sourced income.
For those who live and work across borders, Double Tax Agreements (DTAs) can prevent double taxation by determining which country has the primary right to tax certain types of income.
Knowing your residency status and available DTAs is critical for avoiding unnecessary taxes if you earn income abroad.
Tax-efficient investment options
Certain investment options offer tax benefits, making them ideal for those looking to grow wealth. A few tax-efficient investment options in South Africa include:
Tax-Free Savings Accounts (TFSAs)
TFSAs allow individuals to invest without paying tax on interest, dividends or capital gains. However, there are annual and lifetime limits.
The contribution limit in a given tax year for TFSAs is R36,000. Meanwhile, the lifetime contribution limit is R500,000. You will pay a penalty tax of 40% on any amount you add that exceeds these limits.
Retirement Annuities
Retirement annuities (RAs) can provide significant tax advantages. For example, they offer tax deductions on contributions and tax-free growth until retirement.
Payouts from a retirement annuity are taxable. However, the tax you pay is far less than that of other types of investments.
Local investments
Local investments offer various tax incentives for South African investors. Dividends from South African companies are also often exempt from income tax. Dividends withholding dividends tax still applies at a rate of 20%.
Interest from a South African source is also exempt from tax up to a certain amount. The current exemptions apply to interest earned up to R23,800 for those under 65 and R34,500 for those over 65.
Offshore banking and investing
Offshore banking and investing can provide two key benefits: a way to diversify and potential tax savings.
Offshore accounts allow you to hold assets in foreign currencies, protecting against local currency fluctuations. By spreading investments across international markets, you can reduce overall risk and potentially lower your tax burden.
Some of the benefits of offshore banking include:
- Tax benefits: Income from offshore investments may be subject to different tax treatments, depending on location.
- Diversification: Access to a broader range of products means you can build a more diverse portfolio and help spread risk.
- Asset protection: Offshore investing may help protect assets from local economic or political instability.
While offshore investing offers benefits, complying with South African tax laws is essential. There are also limits to how much you can transfer offshore.
The South African Reserve Bank (SARB) states that South African taxpayers can invest up to R10 million offshore per calendar year. These include locations outside the Common Monetary Area (CMA).
Special considerations for expats and global income
South African expats and those with international income often have a unique tax situation.
It's essential to understand DTAs to prevent being taxed on the same income twice. Knowing which foreign income may be exempt from South African tax can also help to reduce your tax burden.
For expats, staying informed on recent changes, such as those affecting foreign income exemptions, is critical. Doing so can help them manage their taxes effectively
How Holborn can help
Tax planning is essential for financial success. Proper planning can help reduce tax unnecessary liabilities, save money, and grow wealth more effectively. However, understanding the different types of taxes in South Africa and the various rules and laws can be complicated.
Working with an expert can help you stay compliant, optimise your results and provide added peace of mind.
Holborn African is a leading, award-winning financial service provider. We offer tailored guidance to help you navigate the complex South African tax laws and cross-border planning
Book a free, no-obligation meeting to learn how we can help you.
Frequently Asked Questions
Tax planning is the process of making sure you are as tax-efficient as possible. In South Africa, effective tax planning helps individuals and businesses save money. It can also help comply with the country's tax regulations and maximise investment returns.
