The 2012 National Budget was met with mixed responses from many investment analysts and financial advisors. While the treasury’s goal of reducing deficits gave confidence to many analysts who were concerned about the levels of government borrowing in South Africa, the annual deficit may be capped by increased tariffs and taxation. For South African investors, especially those approaching retirement, there are several practical implications of the Budget which should be noted.
Interest Rate Exemption and Tax Thresholds
Good news for retired people is that the interest rate exemption remains unchanged at R22800 for persons under 65 and R33000 for persons 65 and older. However, the tax thresholds have been adjusted in line with inflation and this gives South Africans who earn an income from interest on investments a tax advantage this financial year.
An investor older than 75 can now combine the above rebates and invest R2.5 million at 5.74% (the most recent money market rate) without paying income tax. Persons under 65 with other income sources can now enjoy a R400 000 investment threshold below which no tax will be paid. With interest rates having fallen to relatively low levels, the combination of the interest rate exemption and increased tax thresholds offer a tax advantage, but this may not be the case in coming years.
General Interest Rate Exemption to Be Phased Out
The National Treasury has announced its intention to phase out the interest rate exemption by April 2014. In its place, the government is making way for a new type of investment account which will offer some tax advantages. R 30 000 per annum or R 500 000 per lifetime may be contributed to this new type of account when it becomes law.
Several financial organisations intend to object to the phasing out of the interest rate exemption, arguing that the tax advantaged investment account should be introduced in combination with the exemption and not replace it.