How can I pay the least tax on my collective investment scheme?

Key takeaways

  • You can avoid paying tax on the interest, dividends and capital gains you make on a collective investment scheme if you invest in a tax free unit trust fund or through a tax-free savings account or retirement fund.
  • You cannot withdraw the money in a retirement annuity fund before the age of 55.
  • You cannot withdraw the money in an employer-sponsored retirement fund until you retire, resign or are retrenched.
  • There are rules about how much you can contribute to a tax-free savings account, annually and over your life time.
  • Endowments can save tax for higher earners – generally those paying a tax rate of more than 30% - because the fund pays tax on your behalf on interest, dividends and capital gains.

The tax you pay on your collective investment scheme differs depending on whether you invest directly in a unit trust or exchange traded fund, or if you invest through another product, such as a retirement fund or tax-free savings account (TFSA).

You do not pay any tax on the interest, income or capital gains you earn when you invest in a unit trust fund as an underlying investment or one housed in a tax-free savings account.

Remember, however, that you can only invest up to R36 000 a year, and up to R500 000 in your life time, in a TFSA. Whatever you withdraw, you cannot replace. Read more: What do I need to know about investing in a tax-free savings account?

If you invest in a collective investment scheme through your retirement fund – be it a retirement annuity, your employer-sponsored fund or an umbrella retirement fund, you will also not pay tax on the interest, income or capital gains you earn in the fund. Read more: What are the tax advantages of contributing to a retirement fund?

Tax deductions

In addition, the money you invest in a collective investment scheme through a retirement fund is tax deductible up to certain annual limits – 27.5% of your annual remuneration or taxable income to a maximum deduction of R350 000.

If a collective investment scheme is the underlying investment in an investment-linked living annuity bought with the money you saved in your retirement fund, your investments in the living annuity will also not attract tax on the interest, income or capital gains. Only the amount your draw down annually as an income is taxed at your marginal rate. Read more: What kinds of annuities can I invest in when I retire?

If you are a taxpayer with a high marginal tax rate – in excess of 30% - you may also enjoy tax benefits if you invest in a collective investment scheme through an endowment. Tax on income, interest, dividend and capital gains is paid on your behalf by the life assurance company offering the endowment and the rate is beneficial for higher earners.

Lower earners should seek advice before taking out an endowment as they could pay more, rather than less, tax.

Tax, however, is not the only factor that should influence your choice of investment.