The Role of Taxation in Financial Planning

tax issuesTaxation is a topic that many people don’t like to dwell on, and for good reason – it’s never pleasant to talk about losing money. Although taxes are a part of everyday life, it’s easy to forget the impact of taxation on our net worth. Whether you are working hard to build your investment portfolio or are just a few years away from retirement, taxation will impact your finances directly.

Planning ahead for taxation

One of the worst surprises anyone can receive is a letter from SARS, and to prevent any unexpected problems with your tax returns, you should plan ahead and be aware of any taxes that you need to pay.

If you are a PAYE taxpayer you don’t have too much to worry about when it comes to paying tax on your income, unless you have other sources of income like rental properties or private consulting. However, you may be taxed on the sale of shares and property (Capital Gains Tax).

Business owners and self-employed people should work closely with their financial advisors to avoid paying unnecessary taxes while staying on the right side of the law. VAT payments to SARS must be made in good time, and before tax returns are filed it’s essential that the company’s books are in good order. An unexpected audit by SARS could spell trouble for any business owner, and this is avoidable if tax returns are filed correctly under the supervision of a tax practitioner.

Taxation and Investments

By paying the taxes that you owe while reducing unnecessary taxation, you’ll free up extra money that can be used to accumulate savings and top up your investment portfolio. Your financial advisor or accountant should assist you in in this process, since the tax regulations can be confusing for those of us who don’t specialise in accounting.

Once your investments start to increase in value, you may have to pay certain taxes on your gains and dividends. Once again, your financial advisor will be able to give you a complete breakdown of these taxes, but the main ones to be aware of are Capital Gains Tax (CGT) and Dividend Withholding Tax (DWT).

Recent changes to the tax laws now mean that companies deduct the DWT that is due on dividends before they are paid out – this is like PAYE for shareholders, and the company will pay these taxes to SARS on your behalf. While this makes the taxation process simpler, don’t be surprised to see this amount missing when you receive your next dividend statement.

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