With the dust settling on the Budget, despite the on-going VAT increase protests, the effects of increased taxes are very much a topic of not only conversation but of actual planning too.
In recent times we have seen an increase in Capital Gains Tax, Dividend Tax as well as a higher marginal rate (45%) of income tax for those in the top bracket. We’ve also seen the introduction of donations tax on deemed interest on interest free loans to trusts.
On top of these increases we now have the 1 percentage point increase in VAT as well as the increase from 20% to 25% in estate duty on estates of R30m or more. The same applies to donations tax.
A sugar tax is to be introduced on 1 April which comes on top of higher excise duties. A revised carbon tax bill is likely to see the light of day within the foreseeable future. All of these add to pressure on the consumer.
Furthermore the Davis Tax Committee which has been sitting since 2013, has its eyes on a possible wealth tax and further restrictions on trusts such as doing away with the conduit principle. The latter is an important advantage and allows trust beneficiaries to be taxed on their distributions at income tax rates of between 18% and 45% and CGT at 7.2% to 18% – depending on an individual’s tax position – compared with income taxed in the hands of a trust at a flat 45% and 36% for CGT.
Any legitimate means to save tax is now more relevant than ever. As we have discussed before, Retirement Annuities are an easy way to save on tax whilst at the same time creating a tax sheltered investment.
Other forms of tax relief such as utilising the section 12J allowance which gives a deduction for investments into certain venture capital companies needs to be treated with great caution. We are currently looking into this to assess its viability on a risk/return basis.
Meanwhile, despite some negative publicity, we believe that trusts still have their place in financial planning, provided the primary reasons for creating a trust are:
- Protection of assets, both for the individual creating the trust during his or her lifetime.
- Protecting the interests of heirs – most particularly minor children .
- Creating continuity and liquidity on death.
Obviously the saving of tax using the conduit principle as well as estate duty are considerations but they shouldn’t necessarily be the primary ones.