Our previous blog post dealt with two practical implications of the 2012 Budget, which aims to cut deficits by limiting spending and increasing government revenues through various forms of taxation. Having covered the issues of the interest rate exemption and tax thresholds, we discuss some more important implications of the Budget.
Dividends Withholding Tax
Dividends Withholding Tax will be introduced at 15% this year, instead of 10% which was widely expected. The higher rate of DWT has one major implication for investors who are retirement-focussed: because retirement funds don’t pay tax on income receipts or capital gains, they are exempt from this form of taxation.
The rate of DWT now makes investing in a retirement fund a far better prospect than it was in the past. Because of their DWT exemption, retirement savings funds may now be considered more competitive than discretionary investments and this should be kept in mind by investors who are gearing their portfolio from growth toward income as retirement approaches.
In addition, investors approaching retirement should note that the tax break associated with retirement fund contributions will remain the same for the 2012/13 tax year.
Capital Gains Tax Increase
A practical implication of the 2012 budget which is less positive for investors is the increase in the CGT inclusion rate from 25% to 33.33%. This increase means that the effective CGT for individuals now stands at 13.3% and at a reasonably high 26.7% for trusts.
This increase in GCT may strike South African investors as harsh, but analysts point out that capital gains taxes around the world tend to fall within the 15-20% range or higher. In the UK for example, individuals in the high income bracket currently pay 18% dividend tax and up to 38% CGT while income tax has peaked around 50% in recent years. Until the world economy recovers fully and governments are able to balance their budgets more easily, higher taxation is likely to remain a feature of everyday life around the world.