The new income and dividends tax rates introduced in the 2017 Budget
In his 2017 budget speech, Pravin Gordhan announced the “supertax” rate of 45% on individuals’ taxable income in excess of R1,5m per annum. This tax rate also applies to all taxable income earned by a trust (except a special trust). Should we be concerned?
He also announced that Dividends Withholding Tax is increased from 15% to 20%. Again, should we be concerned?
It all depends upon how you have structured your affairs. Let’s take Income Tax on trusts first.
The effect of the change is that CGT on trusts also increases from 32.8% to 36%. None of this should matter to you as your trust should never pay tax (in fact, it need not be registered for tax for that very reason). How did you avoid this? You made the trust the 100% shareholder in a company (taxed at 28%) and the company earned, and paid tax on, the net income. When you want to draw money out, you draw it as interest on your loan to the company and make up the shortfall by having the company pay a salary equally to you and your spouse (who also earns interest on loan account).
So, if you are both over 65, this is how your income is made up for each one of you –
Tax free interest = R34 500
Salary from your trusts investment company = R300 000 less tax of R32 886 = R267 114
Total combined income after tax = R50 269 per month which is slightly above the figure that most people say they would be happy to retire on.
This means that your average tax rate is 10%.
It is also worth noting that your total joint gross income of R55 750 per month is a tax deductible expense for the company, saving it R15 610 in tax, so your net R50 269 only costs the company R40 140.
Worth planning for?
And as for the Dividends Withholding Tax, if you are employed by your trust’s investment company, there’s no need for it to declare dividends and therefore no need to pay DWT.