Financial planning TO DO list for February

Written by Paul Leonard CFP®, Regional Head at Citadel • Online since 17.02.2016 • Filed under Industry news
Financial planning TO DO list for February

17 February 2016: February is an important month for us from a financial planning perspective because it is the last month of the tax year and it represents the last opportunity for us to do certain things from a financial planning perspective for the current tax year.

Contribute 15% to RAs

We have two weeks left to top up Retirement Annuities to maximise our tax breaks. You are able to contribute 15% of, what is called, your taxable non-retirement-funding income to a retirement annuity. From the new tax year, which begins in March, this rule will change and most people will actually be able to contribute more. The limit is going up 27,5% of either taxable income or remuneration, and this will now include contributions to all retirement funds including pension, provident and retirement annuity funds.

For those who earn more than R2,3 million per year (which is R194,000 per month or more) this month is the last time you will be able to contribute more than R350,000 to your retirement funds and get a tax break in a single year. So if you have the cash, top up retirement funds now and maximise those tax breaks.

Switch portfolios over 2 years to reduce the CGT impact

As with all taxes, Capital Gains Tax is also worked out on an annual basis. If you are considering doing a switch of portfolios – for example you want to switch from a pure equity into a protected equity strategy – then switching out of one fund is seen as disposing of an asset which could trigger a Capital Gains Tax event, depending on the type of vehicle the money is in. To reduce the CGT impact, in some instances it makes sense to do half of the switch in February and the other half in March. This would spread the capital gain over two tax years which means that you could use your annual CGT exclusion of R30,000 twice for the one switch.

This tip only makes sense in some instances. Use it if your money is in a unit trust structure held in your name since the money is taxed in your hands. Don’t use it for money held in any type of retirement fund since that money is not taxed while it’s in the fund anyway. You can switch money in your pension or provident fund at work without worrying about CGT. This tip also doesn’t make a difference to money switched in an endowment vehicle because an endowment structure doesn’t qualify for the annual exclusion that individuals are entitled to.

Use your R1 million discretionary offshore allowance

If you have investable cash every year and you want to send money out of the country on a regular basis, then the easiest way is to use your annual R1 million discretionary allowance. You can do this without having to get tax clearance (you can send an additional R10 million per year with tax clearance), so a couple could send out R2 million between them without applying for tax clearance. You still have until the end of this month to send out R1 million and in March you could send out another R1 million per person.

Give gifts over 2 tax years to avoid donations tax

You can give away R100,000 per year without having to pay donations tax. Say George, has surplus money and wants to give R200,000 to each of his adult children Matt and Stacy (in other words R400,000 between them). This would trigger donations tax, though, because he can only give away R100,000 per tax year, any more than that will be taxed at 20%. This means that George would be in for tax of R60,000. To get around this, George and his wife will each give their children R200,000, but they will split the gifts over two tax years by each giving R100,000 this month and then another R100,000 in a few weeks’ time, in March, which is in the next tax year. This enables them to give the gift but avoid the R60,000 in donations tax.

Invest R30,000 into a Tax Free Savings Account

The last financial planning consideration I want to mention is to invest R30,000 into a tax free savings account. We are each entitled to invest up to R30,000 into one of these per year and there is a lifetime limit of R500,000. You would be investing after-tax money, but all of the returns are totally tax free and the money is accessible at any time. Most South Africans fall below the tax bracket so for most people this investment vehicle is best suited to money that can be invested for the long term, to enable their money to grow to the point that it would break through the tax threshold. It is also suitable for wealthier investors who pay tax on their portfolios. A TFSA will immediately create a tax exempt slice in their portfolio.

By taking advantage of these opportunities in the coming weeks, you will be able to structure your portfolio in the most beneficial way.

 

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