Not all sources of income are taxed in the same way. The interest income, e.g. that you earn in savings account, is taxed differently to dividend income you earn as a shareholder in a company.

As an investor and taxpayer, you should manage your investments and tax affairs in such a way that you maximise investment returns, while limiting your tax expenditure.

This is according to Floris Slabbert, director at Ecsponent Financial Services, who believes that a financial advisor would be best to help guide you through this process but, he insists, “If you find yourself a little overwhelmed and need clarity, it helps if you understand some of the key terms and percentages to get you back on track.”

 

Dividend vs. Interest Income

“Investors in shares, such as those listed on the JSE, can earn an income from the dividends declared by the company in which the shares are held. Before paying the dividend, tax legislation requires the company to deduct dividend withholding tax of 20%. The company pays this tax to SARS on your behalf. I.e. if the dividend declared is R100, you will receive R80 and SARS R20.”

“You will still have to report the gross dividend earned when filing your returns.”

On interest, Slabbert goes on to say that, “Generally, the interest a South African resident and taxpayer earns in a savings or investment account is included in the calculation of your taxable income. However, the first R 23,800 you earn as interest is exempt from tax. If you are older than 65 a secondary rebate is applied, which then increases the total rebate to R 34 500. It is worth noting that this rebate amount has remained unchanged since 2014.

 

Which is better?

It depends on each investor’s financial and taxable income position and there is no one-size-fits-all answer. However, it is an important question to explore with your financial advisor.

Let’s look at Dan’s situation as an example. He is 62 years old and receives R20 000 per month from his pension fund and R4 200 from a fixed deposit at his local bank. Dan has just retired and used his lumpsum one third tax benefit from his retirement fund. He withdrew the full tax free lumpsum portion of R800 000 to reinvest elsewhere and supplement his retirement income.

By opting for dividend income, Dan could pay less tax of R7 303 per year when compared to an interest-bearing investment. This provision allows for an upgrade to Dan’s medical aid, golf membership or extra holiday per year. Additionally, if interest rates should go down or up, Dan’s income is not affected and nor is his tax position.

 

Seek financial help and guidance

At the start of the South African tax year, which kicked off on 1 March, Slabbert encourages all taxpayers, to approach their financial advisor to review their investments, maximise the tax opportunities available to them and make adjustments to stay on track with their personal goals.