29th February 2016 is your last day to cash in investments. If a person is wanting to cash in an investment e.g. shares, unit trusts in the short term, for whatever reason then it will be better to do it before the end of February 2016, as the amount of the capital gain to be included in taxable income will increase from 33.3% in the 2015/16 tax year to 40% in the 2016/17 tax year.
For people with high tax rates e.g. 41%, it means that they will pay an effective tax rate of 16.4% on the capital gain next year versus the current 13.7%.
For example, let’s assume a person has a R3 030 000 capital gain.
The tax payable can be calculated as follows:
- 2015/16 tax year: R3 030 000 less R30 000 exclusion = R3 000 000 x 33.33% = R1 000 000 into taxable income. Assuming a maximum tax rate of 41% results in tax payable of R410 000.
- 2016/17 tax year: R3 030 000 less R40 000 exclusion = R2 990 000 x 40.0% = R1 196 000 into taxable income. Assuming a maximum tax rate of 41% results in tax payable of R 490 360.
As can be seen by doing the transaction before 29 February 2016, a savings of R80 360 will be achieved.
Another idea for investors is to cash in the annual exclusion amount of capital gains each year. In 2016 this is R30 000 and in 2017 it increases to R40 000. Effectively investments can be cashed in on the last day of February and re-invested the next day or soon thereafter (there will be a small cost involved), thereby keeping a person’s base cost lower for future years. It does not sound much, but if this is done over ten years a husband and wife could effectively cash out R780 000 (R30 000 x 1 year + R40 000 x 9 years x 2 persons) of capital gains without paying any tax; assuming no further increases to the annual exclusion.
If a person wants to cash out a small investment in the short term it would be best to split out the encashment over two years – before February 2016 and after 1 March 2016 - they would then benefit from the 2016 exclusion of R30 000 and the 2017 exclusion of R40 000 i.e. R70 000 in total before being liable for any tax.
This all depends on a person’s circumstances, for example, if a person is retiring in the next year or two from a high salary to a lower pension then it would be better to wait a year or two so you can cash out some of the gains when your tax rate is lower.
By Hedley Lamarque, Certified Financial Planner at BDO Wealth Advisers