Tax year-end: Here’s how to lower your bill

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BOITUMELO NTSOKO: Today we’re discussing something that’s on everyone’s mind as the tax year draws to a close – how to save on income tax and optimise your investments for maximum tax efficiency. 

Whether you’re a business owner, a high earner or planning for retirement, there are actionable steps you can take before the end of the tax year to lower your tax bill and set yourself up for financial success. 

For more on this we’re joined by Elke Brink, a wealth advisor at PSG Wealth. Welcome to the show, Elke.

ELKE BRINK: Thank you so much, Boitumelo. Thank you for having me. 

BOITUMELO NTSOKO: Elke, let’s start with investments. Many South Africans hold a mix of cash, bonds and equities in their portfolios. Why is it important to be mindful of how income-producing assets are taxed, and what strategies would you recommend to minimise taxes on investment income? 

ELKE BRINK: I think leading up to the end of the financial year, the end of February, it’s always a good time to have a bit of a check on a portfolio and see where you can maximise not only your portfolio and of course your returns, but also your taxation, as that plays almost an equal role in resilience planning in a portfolio.

I think of course as your portfolio accumulates over time, the taxation planning becomes equally important. So planning for the inefficiencies, but also making sure that you are optimising what you are allowed to do every year. 

Read: A checklist for tax year-end

I think a lot of that falls within the investment product space and a lot of it comes with where I would always recommend working with an auditor or working with a tax advisor as well, with your wealth advisor to know that you’re planning correctly from the start. 

Now, one of the first starting points when it comes to income tax specifically is that I would recommend that investors firstly be aware of how much cash you hold, cash or bonds. So typically anything that is interest-bearing, something that you earn interest on. This would be cash in the bank, but it can also be cash or bond exposure within a portfolio that you are now earning a yield on. 

You as an individual have an annual exclusion and this exclusion differs between when you’re younger than 65 or when you are older than 65. When you are older than 65 you have a larger exclusion. 

Read: Don’t get taxed out: High interest rates could mean high tax bills

Let’s say at the moment, with a high interest-rate environment, cash has for a long time been giving us 9%. Bonds are doing more than that, 10% and upwards. That return that you’re getting over and above your exclusion is seen as income, and this is taxed at your marginal rate.

So it’s quite important to be very careful not to hold too much in cash or bonds – otherwise, it’s going to have a negative tax implication. Depending on what your marginal tax rate is, you can be taxed up to 45% on cash you hold. 

What I typically normally recommend here are two different things. First, diversify more with asset allocation, ensuring that you’re including equity exposure in your portfolio as well. That’s good for two reasons. It minimises your tax implications; but on the other side it does also diversify your portfolio out of a growth context. Equities will always provide a higher return than cash and bonds. So, just playing around with asset allocation, ensure that you’re optimising your tax implications. 

Read: Interest rates and tax on fixed-return products – 6.8% may outperform 12%

Secondly, depending on the fund value, you can also use more optimal vehicles, using endowments or sinking funds where we can typically limit the taxation effect. The benefit with these products is you can cap your income tax at 30%. So, if you for some reason specifically want to hold these asset classes, we can at least decrease the tax implication.

We address other things with these types of vehicles as well. We automatically take this product out of the liquidity structures and give you the benefit that you can now nominate the beneficiary of the product, so you know it can also go to your loved ones directly. 

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BOITUMELO NTSOKO: Elke, tax-free savings accounts are often hailed as a no-brainer for tax efficiency. Can you walk us through the role TFSAs play in building wealth over the long term and how people can maximise their benefits?

ELKE BRINK: I think this is a very underutilised product [being] sold, and it’s a fantastic product for each individual to hold. When we look at the bigger picture and when planning investment portfolios it’s always good to take a bit of a bird’s-eye view of what the ideal portfolio looks like. That will always consist of three or four different products as they all have different tax benefits, different rules and different strategies as to how we invest them. 

Listen/read: Where is the value in a tax-free savings account?

So typically, when you reach retirement – which I guess most of us are planning for – you want to optimise two or three different products so that you can ensure that you are paying the least amount of tax on your income. 

Now, a tax-free investment can actually play a fantastic role in most people’s portfolios. In principle, you are allowed to invest R36 000 per annum and R500 000 in your lifetime. It takes about 14 years to fill up this investment out of a contribution perspective, but this, of course, is growing. There’s no limit to your growth. 

Another benefit of this product is that you can invest it in any way you wish. You can invest it 100% in equity exposure or 100% in a feeder fund with offshore exposure.

So compared to your retirement funds [which] are, for example, more regulated, you just have a little more flexibility in terms of diversification.

What then essentially happens is that now you’re earning this compounding effect, but you’re never going to pay a cent of tax on the proceeds of it.

So you can easily, if you just pull up the investment – and you are invested 100% in equity – this investment will be closer to R1.5 million to R2 million after the 14 years.

You can go even further and just let it lie there and compound.

Essentially you create a few million rand lying there that you can live off [each month] without paying tax. If this can be supplemented – even as a retirement plan and supplementing your income – it’s a great strategy. 

If there was a need to withdraw this product earlier in your life, it’s still fantastic planning within your portfolio without incurring any tax. 

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What I do want to add here is I think to really optimise the product it is important how you invest it. What we see a lot in the investment space is that typically investors who structure tax-frees through a bank tend to invest the tax-frees in cash and bonds. So they invest it much more conservatively compared to the 100% equity strategy that you’re actually allowed to do in a tax-free. Then you’re just not benefitting from all the tax benefits of this product. 

Read: Maximise your 2025 tax benefits: Eight reasons to start a tax-free savings account

So I would really make sure my investment strategy is in line with the benefits of the product, taking into account that you’re never going to pay income tax on it, you’re never going to pay capital gains tax on it. So optimise the growth on this structure while you can. I would make it part of a longer-term strategy in my portfolio. You can literally live off this portfolio one day and not pay any income tax. 

BOITUMELO NTSOKO: So what should listeners avoid doing with their TFSAs to ensure they’re truly optimising their tax efficiency? 

ELKE BRINK: When it comes to the TFSAs, there are a few principles that I think are important. First, trying to actually fill up the investment every year, trying to reach that full R36 000 per annum and reaching your R500 000 limit – and trying not to touch it before then. 

So technically a tax-free is accessible, but if you withdraw from it during your build-up phase, you can never add that year back again. Then you kind of lose that year’s contribution.

So I would really see this investment as a long-term strategy. 

Then my second piece of advice would be to invest it in 100% growth assets. If you’re going to be aiming to fill this product up, it’s a 14-year plan at least, so I would definitely recommend seeing it as a long-term strategy. 

With any other type of accessible investment or a share portfolio, you’re going to be paying some form of tax – either capital gains tax or income tax or some form of it – whereas with this product you’re not going to be paying any of it; so I think [it is] really optimising the growth and the compounding effect within the portfolio over time.

Read: Don’t make investment decisions based on potential capital gains tax

BOITUMELO NTSOKO: Elke, retirement annuities and company retirement funds offer significant tax advantages. Could you explain how contributing up to the 27.5% limit and of course leveraging Section 10C can reduce taxable income and provide benefits at retirement?

ELKE BRINK: When we look at the holistic view, again, I think start off with perhaps on the one side having your tax-free investment [and] secondly looking at your retirement fund, which I think is a fantastic product to use for any investor. This can be a combination of your retirement fund you have at work – if your employer offers one – and a personal retirement annuity [RA] in your own capacity; or a combination of the two. 

In principle what the law says is that you are allowed to invest up to 27.5% of your taxable income on an annual basis in these products, and you can claim all of that back from Sars annually up to a maximum of R350 000 a year. So you can do this in a combination [of] the one at work and perhaps one in your private capacity if you want to diversify a bit. 

Read: Do you understand your corporate retirement fund?

The benefit with the one at work is that, of course, it gets deducted before you earn your income, so it does decrease your taxable income, and it happens automatically. It’s not that it’s going off your net income, so I think you almost get used to it. I think that can be planned very well within your portfolio. 

With the RA, the tax benefit of the retirement annuity in your private capacity is just a backward benefit. Once a year you can claim that back from Sars and receive the payback from Sars. Then I think sometimes the immediate feeling is sometimes better within a company fund.

But I would do a comparison of how the company fund is invested compared to my private retirement annuity, and base it on management-style investment portfolio options.

You can now optimise this 27.5%. So that’s a full deduction on an annual basis, which I would first try to reach as quickly as possible.

Secondly, once you start planning for the view of retirement, there’s a really cool benefit that I know we have been speaking about on Moneyweb quite a bit, but I think it is still very underutilised and not well known; it’s referred to as Article 10C. This comes down to if you were to over-contribute. So you’re doing more than your 27.5% on an annual basis or more than your R350 000 maximum benefit. 

Listen/read: Is Section 10C the key to a tax-free retirement?

So what it comes down to is you can only for the next year claim back that limit, so the 27.5% or the maximum of R350 000. Anything you’ve over-contributed above that is referred to as a disallowed contribution. This essentially starts building up a pool, and this pool you can use the day you retire. So the day you retire, which can be anything after the age of 55, we convert your retirement vehicles into a living or a life annuity. 

Let’s say we choose a living annuity; you would now start earning an income and you would be liable to pay normal pay-as-you-earn tax on this income you chose. If you have this disallowed contributions pool built up, you can use this pool to offset the income tax payable.

So essentially the larger the pool you can build up before retirement, the longer you essentially don’t have to pay income tax at retirement.

So if you can optimise the combination of a few benefits, the combination of your tax-free investment together with this Article 10C for a few years, you can essentially create a retirement where for a few years you do not have to pay any tax at all, which on the one side of course stretches your capital by quite a few years – which essentially means you need less, I guess, at retirement. But on the other side, it just optimises the income you can earn and the net income you can earn because you don’t have to also calculate for the income tax you have to pay.

Listen/read: Should minimising income tax during retirement be the top priority?

And lastly, specifically referring to the retirement fund, I think makes it a fantastic benefit to make part of your holistic planning. It’s a great plan to plan for estate planning. So keep in mind that with investment portfolios this always forms part of the planning.

If you are planning to ensure that your family is going to be okay if you are not here anymore, the vehicles you choose in your investment portfolio become very important, in terms of if it’s anyhow an accessible type of product or a product you cannot nominate a beneficiary on, this will typically go to your estate. So not only is there estate-duty tax payable on it, but it’s also a timeline thing. 

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Most clients I’ve dealt with in the last few months have been struggling winding up an estate [for] anything between one and four years. You typically don’t want to leave a family struggling for that long to just gain access to funds. Using retirement vehicles to ensure that efficiency with estate planning is a fantastic benefit, as well as retirement products [being] completely excluded from the estate and they would go to your beneficiaries directly.

BOITUMELO NTSOKO: Elke, for high-income earners, sinking funds and endowments are popular tools to cap taxes. Can you unpack how these work and why they’re particularly beneficial for certain investors? 

ELKE BRINK: I think it’s a fantastic product again, quickly touching on what I just referred to, the estate-planning benefit. An endowment or a sinking fund is still deemed an asset in your estate, so there will be estate duty calculated on it, but it goes to the beneficiary directly; what makes it a fantastic product is automatically the beneficiary.

So I specifically advise sinking funds more, because I quite like the fact that the beneficiary becomes the new owner. 

In that sense you can technically have a liquid investment, an accessible investment, but knowing it can go to your beneficiaries directly should you pass away. The main benefit with this product is that you essentially first cap your income tax at 30%. So if you for any reason fall on the 30% or [more] mark with income tax, you have the benefit of limiting your income tax. This has the affect again that the capital gains tax is limited to 12%, where that can typically be much higher for a higher net worth individual. 

Listen/read: Big money problems: Top concerns for high-net-worth individuals

The sinking fund product has a local and a direct offshore version. The local version of it will have two tax scales typically. They would be the 30% income tax scale. So if you want to be in cash and bonds or any interest-bearing instrument, this component will be capped at 30%.

If you are on equity exposure and you want to access these funds or make changes to the portfolio, your capital gains tax will be limited to 12%. So let’s say you’re 100% in equity and you make a withdrawal from this investment, it’s taxed at 12%, which is great compared to the normal income-tax scale. 

Read:
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If we look at the direct offshore version, we have an offshore version that’s located in Guernsey. There typically everything is seen as a capital gain, even if you are in cash. We can go into more detail on how that is done, but typically you can then access these funds and the tax implication will never be more than 12%.

So it’s a great way of having a bit of liquidity in your portfolio as these products are typically quite accessible. Secondly, you are limiting your taxation to quite a low rate.

And lastly you are creating continuity by knowing that you can nominate beneficiaries on this product as well, and basically transfer wealth in a very easy way. 

BOITUMELO NTSOKO: Elke, as you mentioned, offshore sinking funds have come with tax advantages and so do other international investment vehicles. What should South Africans consider when incorporating these into their financial strategy?

ELKE BRINK: I think the direct offshore space becomes a very important space to navigate correctly from the start. I think for any South African there’s a lot of opportunity to be found in navigating the direct offshore space. Automatically, of course, if you are investing in US dollars, you can invest with different fund managers and you can invest in different types of equities that we don’t get locally, with a feeder fund and rand-denominated portfolios. You also get to navigate with larger fund managers, which I think is really beneficial. 

But the rules are different in different countries, and think that’s something to be very aware of once you start moving in different jurisdictions.

Even if you are considering tax havens, tax havens are not all tax-free, and I think that’s important, especially from an estate-duty planning [point of view].

What we typically warn investors against is that other countries have what we refer to as pro-bate or Situs tax. It’s typically their version of an estate duty tax payable. And then there are other taxes payable specifically for US- and UK-based investments that they refer to as ‘inheritance tax’. This typically works on a sliding scale, but it can go as high as a 40% tax rate. 

So if you think of a normal accessible product, then your South African beneficiary can potentially be liable for a 40% inheritance tax and a version of capital gains tax, paying over 40% tax just to see the funds for the first time.

That’s something to be very wary of if you don’t know the rules of the other country you’re starting to invest in. 

The benefit of a sinking fund is that we protect you against the rules. By building this wrapper or this investment vehicle around your investment you know what the rules are. So automatically you lock in your tax at 12% and you have the certainty that the beneficiaries nominated would become the new owners of the investment should you pass away. So you don’t have to stress about an estate being wound up and offshore laws stepping in. Basically this individual would just be taking over the investment product. 

Read: How to protect your offshore investments from offshore taxes and estate problems

So I would definitely from day one – if you start navigating into the direct offshore space – make sure [you] use a vehicle like this from the start, since it becomes difficult later to change the vehicle as you would have to disinvest investments, of course, triggering tax and fees to get it into the right vehicle. So rather use the optimal vehicle from the start. 

BOITUMELO NTSOKO: Harvesting losses is a strategy often used to offset capital gains taxes. What should investors consider before selling underperforming assets to reduce their tax burden?

ELKE BRINK: Tax harvesting is a great strategy within a high-net-worth portfolio’s planning. I think that’s where it becomes very valuable to put your wealth advisor and your tax advisor auditor around the same table so that our planning can complement one another’s. But typically what happens, if we have certain investment vehicles, should it be a normal accessible product, should it be an investment in a trust or in a company, there are certain taxations that will be liable either on changes made or just on gains and within a portfolio on an annual basis. 

Listen/read: How to turn investment losses into tax savings

So if you have other accumulated losses within your portfolio that can be utilised to offset the gains that we’ve earned, you can create an ideal space by minimising the taxation effects within a portfolio. It’s always good to just ensure that we are optimising everything and that all the different planning components are speaking to each other in terms of trying to limit the taxation due on essentially growth earned. 

BOITUMELO NTSOKO: For entrepreneurs or business owners, how can using a company structure help manage and reduce taxable income effectively? Are there specific tax-saving opportunities that business owners often overlook? 

ELKE BRINK: There’s definitely a lot of value to be found in structuring your portfolio optimally in principle. I think for most individuals there will be a time when a company as well as a trust plays a role in your portfolio. Here I think the correct advice is very important because you don’t want to start building structures that first cost you a lot of money and have other impacts which I’ll touch on now – which you don’t want to go to if not needed yet. But it does play a very valuable role, firstly, out of a continuity point of view. 

Read: Financial planning for entrepreneurs: Set your business up for success

The main benefit normally with something like a company or a trust is [that] this [is] something that would not typically go to your estate. You can automatically create that continuity in your family or in your business, ensuring that if you pass away the continuity is there. But also [with] different tax rates, so specifically with a company that vehicle is taxed at a different rate. So it’s taxed at a company tax rate. 

So with certain investment products, and much more so if you have your own business, but with many different decisions from a property to certain investments we build, it would be more beneficial for the investment owner to build it within this vehicle. You can at least create certain tax efficiencies, but also manage who is a part of this investment. 

Read/watch:
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I do think it’s important in terms of what I just mentioned – especially navigating to trusts – to keep in mind that for all these types of structures you need to pay for them, of course. So it’s important to offset the benefits of the vehicle and the taxation effect with what your needs are, and if it’s suitable for you. 

Also remember that the moment you start building something like trust, or in many ways sometimes a company, you essentially step away from your assets, so you are not the only owner any more. Or in some cases with the trust you are not the owner at all any more, knowing that there would be trustees who make decisions on this vehicle or this asset, whatever it may be. Maybe it’s a house or a different type of property or a different type of asset. But there’s definitely a place for it. 

Read: Using a trust as a mechanism to protect your assets

I think in many cases, once it comes to accessible types of portfolios, there are valuable roles to be found with using these types of structures, keeping in mind, with the trust for example, that you can have various trustees and beneficiaries on a trust where, out of a taxation point of view, we sometimes like that in terms of we have, for example, six different beneficiaries where we can use everyone’s annual capital gains tax allowance, for example. 

So there are sometimes benefits in terms of having these types of vehicles – and of course how the vehicles speak to each other; how the companies, for example, structure to complement the trust, and the other way around.

Listen/read: Everything you need to know when setting up a trust

That’s something I would definitely structure correctly from the start as well. You typically don’t want to sell an asset and move the ownership again into an entity later on in life. You want to buy or structure it in the correct structure from day one as far as possible. So it’s something I would definitely obtain advice from day one. 

BOITUMELO NTSOKO: Just going back to retirement planning, for retirees or those nearing retirement, how can planning withdrawals strategically help them manage tax liabilities better?

ELKE BRINK: When it comes to retirement specifically I think what is important is knowing that in the ideal world your income source will not just come from the retirement fund you have built up. I think it’s important to know that if you were to, for example, just build your wealth within your retirement vehicles, and now we convert it into a living annuity and you start living off this investment, you’re going to be on the normal pay-as-you-earn tax stable.

Read: Creating a tax-friendly retirement

So you typically want to create a scenario where you can rather draw a lower income from this living annuity, not only out of a capital-preservation point of view, but from an income-tax point of view. So you want to lower the tax rate you’re paying and rather supplement your monthly income from a combination of, for example, a sinking fund with a 12% tax rate, a tax-free investment with a 0% tax rate, and potentially another accessible vehicle, where we can plan your income within your annual allowances so that you’re essentially triggering very little tax or no tax at all. 

So I think the ideal portfolio would have more than one source of income, so that we can ensure we’re benefitting from all the different tax benefits that they hold and how they can complement each other.

I would just plan that from the start. So how you plan this is [to ensure] that you have enough liquidity built up in a tax-free investment or a sinking fund or other type of vehicles apart from your retirement fund. 

Read:
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BOITUMELO NTSOKO: Elke, charitable giving offers both social and financial benefits. Can you explain how this strategy can be particularly tax efficient? 

ELKE BRINK: This is a great benefit for anyone who anyway wants to focus. Of course, I think we all try to navigate in the space that we at least want to also be good to others and give our tenth where we can and how we can on an annual basis.

Many institutions now have the benefit that you get what’s referred to as an 18A certificate. It’s basically a tax deduction. I think, yes, that should never be your primary reason to give, but I think it is a great benefit if it’s an organisation that you would anyway want to give to, and would want to donate to. You can receive the certificate as well and [use it] as a tax deduction within your company or within your private structuring. 

Read:
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BOITUMELO NTSOKO: With the tax year-end approaching, what would you say are the top three actions South Africans should prioritise to ensure they’re taking full advantage of available tax breaks? 

ELKE BRINK: I think my first three focus areas would be first to optimise different products and optimise your asset allocation. My first focus would be to fill up my tax-free investment, so making sure you’re doing the full R36 000. I would ensure, as far as it’s affordable, filling up my tax deduction on the retirement products, so reaching the 27.5%. Of course, if you can exceed that and start building up the 10C benefit, that would be the ideal world, but at least try to get your maximum deduction of 27.5%. 

Read: Four ways to maximise your tax benefits before the end of the tax year

And then lastly, for various reasons but specifically heading into a rate-cutting cycle the yield you are earning on cash – and over the next two years over bonds – will be much less. So the moment you start going into a rate-cutting cycle, you’re earning less growth on cash, and this has a major effect in financial planning in terms of one of our main goals being to outperform actual inflation. To me, actual inflation is what your medical aid goes up with every year, what your real cost of living goes up every year – and that’s not 3% to 6%. 

So I would be wary of being too heavily in cash. I know a lot of investors find it comfortable and find it predictable, but I think it’s a dangerous place to be if you’re not outperforming inflation, which is already the case after two rate cuts.

So that’s something I would look into – ensuring you are diversifying with asset allocation. It’s going to decrease your income tax effect and it’s going to increase your growth, and you are just making sure that you are amending your portfolio again as we head into the new financial year.

BOITUMELO NTSOKO: And that brings us to the end of this episode. Thank you for joining us today, Elke, and sharing these much needed tips. 

ELKE BRINK: Thank you so much for having me, Tumi.

BOITUMELO NTSOKO: That was Elke Brink, a wealth advisor at PSG Wealth.

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