By Hedley Lamarque, Certified Financial Planner at BDO Wealth Advisers
If you have been planning on cashing in an investment (such as shares or unit trusts) in the short term, then it would be better to do it before the end of February 2016, due to changes in capital gains tax. The amount of the capital gain to be included in taxable income will increase from 33.3% in the 2015/16 tax year to 40% in the 2016/17 tax year.
For people who fall into a high tax bracket, such as 41%, it means that they will pay an effective tax rate of 16.4% on the capital gain next year versus the current 13.7%.
For example, let’s assume a person has a R3 030 000 capital gain.
The tax payable can be calculated as follows:
2015/16 tax year: R3 030 000 less R30 000 exclusion = R3 000 000 x 33.33% = R1 000 000 into taxable income. Assuming a maximum tax rate of 41%, this results in tax payable of R410 000.
2016/17 tax year: R3 030 000 less R40 000 exclusion = R2 990 000 x 40.0% = R1 196 000 into taxable income. Assuming a maximum tax rate of 41%, this results in tax payable of R490 360.
So as you can clearly see, doing the transaction before 29 February 2016 will get you a saving of R80 360.
Get maximum advantage from the annual exclusion
Another idea for investors is to cash in the annual exclusion amount of capital gains each year. In 2016 this is R30 000 and in 2017 it increases to R40 000. Effectively, investments can be cashed in on the last day of February and re-invested the next day or soon thereafter (there will be a small cost involved), thereby keeping a person’s base cost lower for future years. It does not sound much, but if this is done over ten years a husband and wife could effectively cash out R780 000 (R30 000 x 1 year + R40 000 x 9 years x 2 persons) of capital gains without paying any tax (assuming no further increases to the annual exclusion).
If you want to cash out a small investment in the short term, it would be best to split out the encashment over two years ‒ before February 2016 and after 1 March 2016. You would then benefit from the 2016 exclusion of R30 000 and the 2017 exclusion of R40 000 ie, R70 000 in total before being liable for any tax.
This all depends on one’s individual circumstances. For example, if you are retiring in the next year or two from a high salary to a lower pension, then it would be better to wait a year or two so you can cash out some of the gains when your tax rate is lower.
BDO provides audit, tax and advisory services in 154 countries, with over 64 300 people working out of 1 400 offices worldwide, incuding South Africa.