Offsetting Capital Gains Tax / Reducing PAYE
27 November 2018
By Mike Clare; Independent Consultant and Financial Services Distribution-strategy Specialist
In the past there were a variety of options for South African taxpayers to legally reduce their annual tax liabilities. Changing economic times and an increasingly challenged fiscus have meant that, over the years, the number and variety of these options have steadily been reduced.
Investment made into a Section 12J company by a private investor can be deducted from his or her taxable income in the year that the investment is made. So, instead of having to make (or not make) investment or asset sale decisions based primarily on tax implications, private individuals now have the opportunity to invest their bonus or sell their assets in a way that allows for any tax obligation to be offset, and addresses any anticipated market risk exposure.
Here’s a look at how a Section 12J investment achieves this:
Offsetting Capital Gains Tax
- Individual A has the opportunity to sell a business or reweight a private share portfolio.
- Going ahead with the transaction will deliver proceeds of R10 000 000.
- The original cost of the assets was R5 000 000, so the resulting profit or capital gain will be R5 000 000.
- Given a tax inclusion rate of 40%, the taxable gain from the transaction will be R2 000 000.
Under normal circumstance, this implies a tax liability of R900 000, which represents a massive reduction of 18% of the total value materialised from the transaction. However, if Individual A elects to invest R2 000 000 (the taxable gain from the transaction) into a Section 12J company, he will not incur a single cent of tax on the entire value of his business sale or portfolio reweighting.
For Individual B, who is a senior manager at a large firm, the benefits of Section 12J are no less appealing.
- She earns a bonus of R1 000 000 at the end of 2018.
- At her maximum tax rate of 45%, this means she will have to pay R450 000 more in tax for the 2018/19 tax year.
However, if she chooses to instead invest the R1 million into a Section 12J fund for five years, she incurs no tax on her bonus, which effectively translates to a R450 000 tax refund, simply for making a prudent investment.
In both cases above, if the individuals invest in a Section 12J fund offered by a high-calibre organisation which is backed by respected professionals, that has a fair fee structure, effective risk mitigation strategies and a clearly defined exit strategy, then there is a very good chance that their investment will enjoy inflation-beating, risk optimised returns over the five years they are required to retain it.