Our Minister of Finance announced in the budget proposals this week an increase in withholding tax on dividends from 15% to 20% which further erodes the returns you receive from being invested in shares. This gives you even more reason to be invested in a tax free savings account (TFSA).
If you move quickly there is still time to get invested before the tax year end on the 28th February.
If you are invested in unit trusts or exchange traded funds you should consider the comparative advantage of having the exact funds invested through a tax free savings account.
Tax is applied to all sources of returns If you are invested in a balanced unit trust fund, you are probably attracting tax on interest from money markets and bonds, rental income from property investments and tax on dividends from shares. These deductions erode the return on your investment.
Beef up your compounding effect Growth on your investment is largely dependent on compounding of your returns over time. If you reinvest the growth every year you effectively achieve growth on growth into the future. Over time this becomes a mathematical phenomenon rocketing your investment value over time.
So it stands to reason that if you invest in the exact same unit trust through a tax free savings account your return will be that much bigger because not tax is deducted. Compounding on this higher return simply means more for you in the future on the exact same fund. A no brainer!!!
Capital Gains is neutralised If you disinvest your current unit trust and reinvest in a tax free savings account up to the maximum annual allowance of R30 000 (next tax year R33 000) you will significantly beef up the performance of your investment. The potential Capital Gains Tax which will be applied to selling off your unit trust will be offset against your annual exclusion amount of R40 000.
So if you made the investment before the end of February you have taken full advantage of the tax break for the year on CGT and maximised your allowance for investing in the TFSA into the future.