Question

I have R4m to invest to provide an additional income to meet my monthly obligations.  I am working and paying 36% in income tax.

Where can I invest this money and draw an income and not have too much of it going to SARS?

Answer

It is important that you always look at the after-tax returns that you will be getting on an investment.  You often see very attractive returns advertised but once the tax has been deducted you could find that you may have done better if you invested elsewhere.

I will run through a couple of options that you can consider along with their tax implications. 

Investments that pay interest like bank deposits and retail bonds

Banks and retail bonds are currently offering excellent returns.   The downside here is that the interest income will be taxed at your marginal rate once you have exhausted the interest exemption. The interest exemption is R23 800 if you are under 65.  If you are over 65, the first R34 500 will not be taxed. 

These types of investments are attractive if your tax rate is low.  However, in your situation, where you are paying 36% in tax, you may do better elsewhere.

Investments like unit trusts and ETFs

These investments are a lot more tax efficient as their growth is rolled up and you will only pay tax when you make a withdrawal.  The advantage here is that the tax that you pay is capital gains tax (which is effectively 40% of your marginal rate).  The first R40 000 capital gain that you make a year will not attract capital gains tax.

This type of investment is certainly worth considering for those in a high-income tax bracket. In your situation where your marginal rate is 36%, your capital gains tax rate would be 14.4%. 

Insider tip

If you are going to use a structure like this, it makes sense to have some of your money in a fund that is relatively stable so that you are not that badly affected by any short-term movements in the stock market.  If you have a high marginal tax rate, you should use a portfolio that pays out dividends rather than interest as the tax rate on dividends is lower than that on interest.

Voluntary annuity

Many life insurance companies will provide you with a guaranteed income for a period of 5 or 10 years.  At the end of that period, you would get your investment capital back.  What you must remember is that while the rand value of your capital will be the same, its buying power would have been impacted by inflation over the five or ten years during which the investment has run.

What is nice about this investment is that you’ve got certainty in terms of the income that you’re going to be getting each month. You would need to get a quote so that you can understand the tax implications as the term of the annuity will impact on the tax that you’re going to be paying.

As you can see, there are several options for you to consider.  Once you have tested these, you should be able to draw up a decent shortlist of potential investments that could work for you.