No one likes tax, but if you understand and apply a few taxation basics it will be much less of a thorn in your side and you might even be able to claim that little bit extra the next time SARS comes knocking.

Even though it does not always feel like it, there is such a thing as tax ‘basics’. We tend to get so obsessed with the calculations and always trying to figure out exactly how much tax we will pay, that we often forget about the more practical side of taxation – things like when and how the Receiver expects you to report to him and what documentation you need to hang onto in order to substantiate your claims. Believe it or not, the taxman does not generally tax you twice on the same money. In fact, he may even give you generous tax concessions for certain types of savings. If you are feeling a bit sceptic, keep reading and we’ll demonstrate.

Because SARS wants to encourage us to save for retirement ourselves (as opposed to being a burden on the state in our old age), they give us generous tax savings when investing in a retirement product. While voluntary or discretionary savings are nice to have, they do not guarantee that you will have enough money at retirement because there is always the possibility that you may spend it long before you get to retirement. SARS therefore chooses to tax you at different points of the various investment types in order to encourage disciplined behaviour.

There are three major points in any investment at which you need to consider taxation – not just the potential payment of tax, but also certain tax concessions available to you. If you can figure out at which of these three stages you are going to get taxed, it may help you to plan your cashflow and financial targets.

Think of the flow of your money – it hits your pocket on the day that your employer pays your salary, but before that, tax was already deducted. So by the time you get to spend it, it is after-tax money. Now you can invest it in whichever way you choose. While the timing may be different depending on your investment type, the basic investment phases are the same for ANY investment:

Initial Investment+Growth (income & capital)=Final Proceeds
(Phase 1)(Phase 2)(Phase 3)

Without going into the numbers, let’s do a case study to demonstrate the 3 possible taxable phases of your investment by comparing the two most popular types of investments: a retirement annuity (RA) and a unit trust.

Phase 1: Contribution

This is when you start a savings plan or investment. Remember, we start our contributions with AFTER TAX money since our salaries have already been taxed.

At this point, your contributions to a Retirement Annuity will trigger a tax deduction. You will be able to deduct your contributions (limits apply) from your annual income so that you get taxed on a lower amount of total income when you do your annual tax return. You will get a refund from SARS of the tax that was previously applied to your contribution amounts when your employer taxed it as part of your salary. This effectively turns the money in your RA into pre-tax money again.

A unit trust does not enjoy any deductibility. Your investment is still “after tax”.

Both of the investments will now start to grow, which brings us to the second taxable point.

Phase 2: Growth

Growth can come in two forms: income and capital gains. Income is often recurrent in nature (like interest earned from the bank or rental income earned from a tenant). Capital growth is an increase in the starting value of your investment or asset.

Another form of income worth mentioning is dividends, which are paid by companies to their shareholders. Dividends incur a withholding tax, and this means that the company paying the dividend to you will withhold a small amount (currently 15%) for SARS and pay you the proceeds net of tax.

Neither income accrued, nor capital gains are taxed within your RA during its lifetime. There is also no withholding tax on any dividends that are paid to an RA. Your money is growing tax free.

A unit trust will require that you declare any income earned and capital gains realised on your investment every year when you do your tax return. While income is earned continuously throughout the lifetime of a unit trust investment, capital gains are only triggered when a specific transaction (like redeeming your unit trusts or selling your shares) occurs. To assist you, your service provider will give you an annual income statement (IT3b) and Capital Gains certificate (IT3c) that will confirm the amounts you need to declare to SARS when doing your annual tax return.

At some point, you will need to access your investment. If you are saving via an RA, this can be from the age of 55 onwards. A unit trust can be redeemed at any time with no restrictions or minimum investment periods.

This brings us to the final stage of your investment. The point you have been working towards right from the beginning.

Phase 3: Redemption

To date, your RA has not incurred any tax at all. Your contributions were tax deductible and your growth was tax free during the lifetime of the investment. At this point SARS wants their piece of the pie. Having said that, they are still very generous in keeping with the general principle that they want to encourage retirement savings.

Your RA will be divided into a lump-sum of your choice (up to a maximum of 1/3 of your total investment) and a recurring income payment, similar to a salary from a company or a pension from a formal pension fund. Up to R500 000 of your lump-sum will be tax free and the balance will be taxed according to a sliding scale.

The recurring income will be taxed according to the normal tax tables like your salary used to be when you were employed. Keep in mind that your tax rate reduces significantly from age 65.

Your unit trust has been taxed in both previous phases by the time you reach phase 3. You did not enjoy any tax deductions when you initially invested and you have been declaring the income and capital gains (if applicable) on your tax return every year. Your final pay-out will therefore only incur tax on the last bit of undeclared growth accrued between the end of the last tax year (28 February annually), and the redemption date.

The proceeds will be paid out to you before tax and you will submit your IT3b and IT3c to SARS when you do your next tax return. If you have never switched your unit trust fund during the lifetime of the investment, the capital gains could be significant. You will need to keep this in mind to ensure that you have sufficient funds available to pay SARS when you do your return. Your product provider will be able to give you an estimate of the gain on the day you withdraw.

We can summarise the above as follows:

Taxation PhaseRetirement AnnuityUnit Trust
Taxation Initial

Phase 1 – Investment

Tax deductible contributions (limits apply)No tax deductions
Taxation Initial

Phase 2 – Growth


No income taxTaxed annually, declared on IT3b

Capital gains

No Capital Gains TaxRedemptions and/or switches incur Capital Gains Tax. Declared on IT3c
Taxation Initial

Phase 3 – Redemption

Generous tax free amounts on lump sum & lower tax rates on income from age 65Tax free*

*As mentioned above, any growth (income or capital) accrued as part of Phase 2 between the end of the last tax year and your date of redemption, will have to be declared to SARS when completing your next tax return.

By applying the “I-won’t-be-taxed-twice-principle”, you can generally figure out at which points your investments are treated favourably and at which points you need to make declarations and payments to SARS.

While tax is an unavoidable reality, it is perfectly legal (and very possible) to structure and plan your tax in an efficient manner. By ensuring that you make use of all the allowable tax concessions available to you, you can maximise your investment returns and enjoy your well-deserved savings when it suits you most.

Staying organised and ensuring that you keep track of the requirements from SARS about when and how you need to declare your investment income to them will have the added benefit of allowing you the peaceful sleep you will need to recover from all the exciting adventures your investments made possible.

If you need to save for any goal – be it retirement or that Mediterranean cruise – give Stringfellow Investments a ring on 0860 787 464.