The Swan Effect - Creating and Sustaining Your Financial Wellbeing
The Swan Effect - Creating and Sustaining Your Financial Wellbeing
S2 E7 From tax-poor to tax-rich
In Episode seven of Season 2 of the Swan Effect podcast, Arthi and Malika talk taxes (yes, that word we love to hate). As part of understanding your moneyverse, which is the theme for the podcast for 2023, one has to become familiar with leakages that disrupt growth of the moneyverse, and still find ways to find opportunities therein.
Is that even possible?
Listen to the episode to find how how it is certainly possible!
Malika offers us insight on the 4 main direct tax types most of us deal with regularly, while Arthi further mentions some of the indirect taxes we also face (did you realise there were these taxes you face as an investor, and consumer?)
The discussion goes deeper, as Malika and Arthi talk more about:
- How avoiding tax is unfortunately not an option
- The importance of understanding your marginal tax rate
- Becoming tax efficient in order to create a tax rich position for yourself
- The tax we love to hate…Income Tax
- Capital gains tax and which assets apply
- Dividend withholding tax
- How ANY interest is taxable
And so much more!
Hear some practical tips on how to ensure you can work some of these taxes to still benefit you, and be in a better position for the upcoming tax year.
Remember: “the power is within your control!”
We would love to hear your views based on the concepts covered in this episode.
Do rate, write a review, and share with others.
This episode is proudly sponsored by Old Mutual Wealth.
Arthi Rabikrisson 0:00
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Hi, there, I'm Arthi Rabikkrisson
Malika Petersen 1:48
Hello, I'm Malika Peterson. Welcome to The Swan Effect podcast.
Arthi Rabikrisson 1:54
Money makes the world go round. Yet it's not so easy to understand its complexities,particularly when it comes to investing.
Malika Petersen 2:02
That's why Arthi and I are using this platform to educate, inspire and help you gain confidence in your relationship with money
Arthi Rabikrisson 2:11
So that you can better manage your finances and investments.
Malika Petersen 2:16
We are two women in finance.
Arthi Rabikrisson 2:18
That's pretty cool, isn't it?
Malika Petersen 2:20
It certainly is. You've been in stock broking, private wealth management, asset management. And now an award winning business woman who is coaching and assisting businesses with capital and strategic advice
Arthi Rabikrisson 2:33
and Malika you have a wealth of experience in wealth, excuse the pun in financial planning, investments and relationship management. So you're also at the coalface when it comes to where and how people are investing, or getting it right and getting it wrong
Malika Petersen 2:52
and stuck in the grey areas too
Indeed, I've seen the many phases and moods of financial cycle and how our decisions that those times impact us. So listeners and subscribers. If you are looking to get unstuck, feel empowered and make some strides in how you tackle your money. We are here to help you.
Arthi Rabikrisson 3:14
And it all starts with listening to this upcoming episode.
Malika Petersen 3:19
Enjoy.
Arthi Rabikrisson 3:22
Welcome back, everyone. I can't believe we are already in March of 2023. This year is flying by at lightning speed. Hi Malika. How is your 2020. Me been thus far?
Malika Petersen 3:35
Hi, it, you're absolutely correct that the year has been moving at lightning speed. It is for this reason that I've recently had to be real with myself to be honest about my own action plan. And the steps that I'm taking towards my goal.
Arthi Rabikrisson 3:52
Well, it is important to reflect and do a check along the way. So I get that
Malika Petersen 3:59
I've been on a bit of a journey of mindfulness, right. And part of that is doing introspection, and understanding that even in situations that are less than ideal, I need to examine the options that I have to improve that situation. For example, everyone hates paying taxes, right?
Arthi Rabikrisson 4:20
Oh, yes. I mean, it's like the saying goes there's only two things certain in life, death and paying tax. And no one likes to think about either, but, you know, Malika taxes, you know, I find specifically on that the degree of distaste when we talk about taxes, I mean, it goes from, you know, the sort of meat acceptance like I can't do much about it. So things like that and and then you go to the other end of the spectrum and it's this grudge factor and there's real contempt for it like the PAYE the pay as you earn that we that is taken away of our salary. So I think we can all We'll agree taxes generally make us feel poorer, because we don't see the benefit of them tangibly, what they meant
Malika Petersen 5:06
Yeah, I think I think you've hit the nail on the head. Rationally, we know where taxes are used, right? We understand that they use for infrastructure like roads, schools, hospitals, etc. but emotionally, we almost feel betrayed by the fact that there seems to be this disconnect between what we pay and what services are actually received price. Yes. And that can definitely put one in a mood of despair, right, or feeling like your hands are tied. Here's the thing, there are ways to feel a bit more in control, about ones taxes. So like I say to you, I had to do some personal introspection, for example. And I realized, I had to call myself out, I realized that I had not done enough last year to put myself in a better tax situation this year.
Arthi Rabikrisson 6:01
Okay, so, Malika, are you saying then that by taking certain actions, you can actually influence your tax liability or simply put how much tax you actually paying? So you know, what's coming into my mind? I'm thinking of the words evasion, and avoidance idea.
Malika Petersen 6:22
I do this, it's not that kind of show. Absolutely not. Right. And I think that let's just be clear, with our listeners, there's tax evasion, and avoidance or not options that anyone should consider, besides the fact that we have a civic duty to pay taxes to make sure that you know, just in general, our infrastructure is improved, etc. It's obviously illegal, and it's punishable by hefty fines, right. But there's always thing this thing that I like to call tax efficiency.
Arthi Rabikrisson 6:50
Hmm, okay. Okay. Well, I mean, I'm glad we are clearing that up. Okay. So let's get back on track, then. Which taxes are we then talking about in terms of us still paying taxes, our sole duty, as you said, law abiding citizens, yet still being left in a position that's favorable? Or as we are calling in today's episode in a tax rich position?
Malika Petersen 7:15
So that is a very good question it. There are a few different kinds of taxes. And I think some of our listeners would be familiar with some of them, and others, maybe not so much. Right. All right. So for the purposes of our discussion, today, I'm gonna talk about four taxes for four kinds of taxes. The first, and obviously most common is income tax.
Arthi Rabikrisson 7:42
Right. So this is the one we all know and love to hate. As I mentioned earlier, the pays you earn tax. Okay, everyone has a quick refresh, then. So we're all on the same page, your income tax is the tax that's levied against your income. Okay. So the percentage of tax you pay is dependent on the earning bracket that your income falls into or, as it's typically known your marginal tax bracket, okay, so I'm trying to simplify it for us. But these are the terminology that's used. So as a result of these different tax brackets, they are tax rates that are applicable, and they're somewhere between 18% to about 45% of your income. So for those income levels, so people who are earning more than R95,508 , the threshold levels then come into pay, meaning you'll only be taxed on the portion of your income that is above the threshold amount. Okay, so we're not going to go into the nitty gritty details of the calculation, so that we can try and come up with what a person's average tax rate is, or how much you actually paying away to the South African revenue, service or SARS. But let's just suffice to say that you are taxed in steps that progressively get bigger or larger as your income increases.
Malika Petersen 9:06
Thanks for that it so a simple understanding of your income tax. And listeners, we encourage you ask questions, so that you do understand what your marginal tax rate is, right? And how it's calculated. Arthi gave us a very, very good, simple example, but speak to your tax practitioner. They are free online tools, tax calculators, you need to become more comfortable with your knowledge of how it works. So the next common tax that some of us may know is CGT or capital gains tax. And this tax is levied against any profit that you would make from the sale of your assets. So this is usually about your quarter of your marginal tax rate. So let's assume for the purposes I have our example that you fall into an income bracket, where you meant to pay 20% tax or your marginal tax rate is 20%, you will then need to pay 5% of any gain you made from the sale of any asset. And generally, every year when the budget speech happens, like it just recently has, they will announce a threshold of the amount of gain that you can receive before this tax becomes applicable. But generally, it is a quarter of your marginal tax rate.
Arthi Rabikrisson 10:34
I mean, I think that's simple enough for us to to understand. And I think it's a good way for us to actually then ensure, again, that we understand our marginal tax rate so that in future if we are going to be selling off any assests, we can almost do that calculation quite quickly for ourselves in terms of how much we can pay. Because, you know, the thing is, I've realized Malika, many people aren't actually quite sure how CGT works. Okay, yeah, so everyone, you know, CGT, you only pay this if you're selling an asset, okay? And remember, in Episode Six, we actually listed some of the assets, okay. But bear in mind, not all assets are liable for CGT payment if you sell it. So specific assets like property, your unit trust, exchange traded funds, or ETFs. Businesses, even your Krugerrands or your cryptocurrency, those yes will definitely attract CGT if you're making a profit on that sale, but other assets, things like jewelry, art, books, these are all termed personal use assets. So they don't attract CGT.
Malika Petersen 11:44
That's absolutely correct Arthi, and thank you for reminding me about that episode, because it's quite interesting that we spoke about assets. And now and now we're talking about the the tax associated with this. Now there's a third tax, right, we said they will four And the third one is what we call dividend withholding tax. So this is essentially when you own a part of a company or share, right? And dividends are declared by that company, right? You generally receive those dividends and 20% of that goes to tax. Now, it is important to understand two things, you may not own the company directly, you might also own the company via a unit trust and receive dividends that way, 20% of that still goes to tax, right. And it's the company paying the dividend that has to withhold the tax and that's why they call it dividend withholding tax, right. And that company before they pay their dividend to you will withhold that tax and then pay it over to SARS. Right. Okay. There are however, certain entities that are exempt from dividend tax such as public benefit organizations, mining rehab trusts, and your retirement fund vehicles. So that your pension provident preservation funds as well as your retirement annuity.
Arthi Rabikrisson 13:07
I mean, we've already covered three in Malika. But I mean, there's so many taxes to consider actually, right. Which is no wonder it is on that spectrum. As I said, we're either accepting the tax or, we really in contempt of it. Okay. But, you know, it's enough to put us in a spin. But as we said earlier, reminding all of ourselves and our listeners that a tax professional, such as a consultant will really be so useful for us to actually gain that knowledge, you know, and especially when we're needing to complete our tax returns, or if we're doing our personal or business accounting as well, it will be so useful to get involved, but then also have a dedicated tax consultant or practitioner who can help us with that process, too. We don't want to get it wrong, after all,
Malika Petersen 13:53
Yea, this this is a very important point it because often, we don't realize the taxes that we incur, we only realize them once we've incurred them. Right. And I think that brings us to the final tax, which is, in my opinion, the tax that most of us incur, and we don't even realize it right? interest tax. So whatever your marginal tax rate is, it's levied against any interest that you earn in excess of R23,800 per annum. If you're younger than 65 years old. Then in any interest, if you've got any kind of lump sum sitting in the bank, and you're earning interest on that money, that money is taxable at your marginal tax rate.
Arthi Rabikrisson 14:40
Right, right. So the you know, what I'm taking away is this understanding of our marginal tax rate is actually so important for us to now calculate and understand all these other ones that we've mentioned. So, Malika, thank you so much for breaking it down in terms of these four key types that we're discussing today. So everyone, to recap We've mentioned and explained, hopefully quite simply for your benefit, income tax, capital gains tax, dividend withholding tax, and of course, now your interest tax. Okay. So as I said, again, it's quite a few taxes. But here's the thing. Malika. Now that we're aware of these right, brought us to conscious, how do we move away from being tax poor to becoming tax rich?
Malika Petersen 15:26
So remember, I started the episode saying, I needed to do a bit of introspection and call myself out a little bit. So there are essentially, two ways in South Africa that you can ensure tax efficiency for yourself. All right. The first is that we can contribute a maximum of R36,000 per annum into what is called a tax free investment. And this investment is not subject to any tax on the investment growth. None whatsoever
Arthi Rabikrisson 15:57
That I love, right. So this is a really beneficial feature everyone have a tax free plan. And it sounds like it's an ideal savings vehicle. But sadly enough, I don't think there's enough South Africans that are putting away money into tax free accounts Malika.
Malika Petersen 16:13
Absolutely. You 100%. Right. And it would have been great to invest all our savings there. But obviously, there's an annual limits, as well as the lifetime limit of R500,000 for your entire lifetime, which makes, which makes it difficult to put absolutely everything there right. Hey,
Arthi Rabikrisson 16:31
okay. I mean, okay, so I was I was already thinking, how can I ensure I am putting enough away in terms of tax free, but obviously, yes, there's that cap that you've mentioned. So that's very important for us to remember. Okay, so that's the first one that we've mentioned. And you know what, Malika? I'm gonna guess so I'm gonna guess that the second one that you're going to talk about is in the retirement vehicles, like your retirement annuities and pension funds, am I right,
Malika Petersen 16:57
absolutely. Spot on.
Arthi Rabikrisson 17:00
Because you know what I mean, so I was paying attention, and you actually gave it away when you mentioned earlier, that there's certain entities that are exempt from dividend tax. So listeners, did you catch that too? I hope?
Malika Petersen 17:14
Basically, listeners to reiterate, you can invest an unlimited amount in retirement annuity. Right. And again, this is not subject to any tax on the growth. That means the interest earned is tax free, the dividends earned are tax free, any capital gains of growth that you receive in your retirement annuity is tax free as well,
Arthi Rabikrisson 17:35
right. I mean, I'm just hearing it's cancelling out these taxes that we've just talked about, if we're doing this. So you know, everyone, I think we can actually have peace of mind then knowing that the money that's available in your tax free accounts or even in your retirement fund accounts benefit from hopefully positive market movements, and potentially then the full full opportunity that comes from compounding, right? That final amount before you withdraw it is typically then what becomes available for you to use, okay, I mean, and let's let's not take into consideration there might be some fees that come in, depending on who you're gone to, in terms of the provider of these accounts, but you're not then getting hit with all of these different taxes at the end of the day. Now. Malika, I want to return to what you mentioned a short while ago, we you said that our RAs give us the opportunity to leverage our investments. So what did you mean by that?
Malika Petersen 18:34
So I think this is really the reason that I say that RA is the gift that just keeps on giving. Okay, let me paint this scenario for you. Let's assume you contribute R1000 per month in turn, alright. Okay. Okay. That essentially equates to R12,000 per year. Yes. Now, remember that R12,000 is growing in the market without incurring any dividends tax, any interest tax, any capital gains tax, right? It's growing, it's enjoying it enjoying market growth. It's it's allowing itself to build on itself right? At the end of the year, SARS will deduct those contributions from your total earning and then refund you the tax that you've already paid on that income amount, they would assume whatever you put into the RA, that amount is going to be deducted from your total income for the year.
Arthi Rabikrisson 19:32
You know, I get it, I get it. It also means that if I were to invest that tax return from SARS now that and I put that back into my retirement annuity for the next year, I would then get tax back on that 12,000 contribution plus whatever my tax return was, oh, I'm feeling the compounding feeling it!
Malika Petersen 19:53
You hit the nail on the head on Arthi. And think about this, if you do that every year. It's compound growth on tax returns that allows you to leverage the growth within your investment.
Arthi Rabikrisson 20:08
I am loving it and feeling rich. Talking about this because as we've said before, in our, in our previous episodes together, Malika compounding is the eighth wonder of the world, everyone. And the proof is truly laid out for us in the example that you've provided Malika. So thanks for that. Okay, so we've been talking about these different taxes, these four types, and I think, you know, they typically considered to be direct taxes, meaning it's levied on us as individuals, or our organizations and our companies. Okay. But I mean, I guess I also want to remind us and maybe make it known, we know about other types of taxes, too, which are called indirect taxes, things that are we're familiar with, like Value Added Tax VAT on our goods and services, excise duties on the sale of alcohol and tobacco products. So we know about direct taxes to Malika.
Malika Petersen 21:03
Yeah, yeah. No, absolutely it and, and these taxes that we pay, based on our habits and behaviors, right. So it's very difficult to consider tax efficiency, around indirect taxes, because it really does mean that you need to, for example, actively look for zero rated or exempt goods. Alternatively, quit smoking or drinking alcohol, right? Both of these would put more money in your pocket, because you're not consuming these anymore. But for many people, that's quite a hard choice to make. And the other thing is, they're not many goods that have zero rated, or exempt taxes that you could buy.
Arthi Rabikrisson 21:47
I hear you now that you've pointed it out, I can see how true it is. Because I mean, your excise duties on things that are lifestyle and habit. And you know, people make the choices based on what they like or don't like. And exactly, there's not enough goods out there that are exempt from VAT and things like that. So I guess you know, when we think about our moneyverse everyone, which you will remember is the theme for 2023. It's about growing out of moneyverse habits, like what you've just pointed out to us, Mallika do help us to grow our moneyverse over time. So let's refocus in around the habits on investing and saving Malika. What other practical ideas, can you offer our listeners about how to become tax rich?
Malika Petersen 22:33
All right. Sure. So another one from me is you mentioned that upside to stock in one's portfolio. When there is positive market moves, right, your stock will always move up in a positive market, right? Yes,So now we all know that the stock market is volatile, we fully aware of this. And investments in Unit Trust, for example, will be liable for tax. So one way to still participate in the market while being tax efficient is used in tax free investments. Remember, in South Africa, we have both savings accounts and investment accounts. So when you invest in a tax free investment, you don't pay the taxes, but of course to investment will still experience stock market volatility.
Arthi Rabikrisson 23:24
And, and I'm glad we're making the distinction between the savings accounts. And there's these investment accounts as well. And as you said, Malika again, when we initially said it, I thought, oh, we need to go and put all of our money into tax free, but remember the threshold everyone, okay, you could get penalized if your lifetime amount ends up going beyond 500,000. So just be mindful of that. Okay. So while you were talking, I also thought of something that I thought would be useful to share and Malika you you would have heard that there's so many different types of investment strategies. I mean, you deal with this all the time talking to your clients. And one of them a very popular one is the buy and hold strategy, right? So it means that you invest your money for longer so that you can participate in in bigger and greater growth prospects. Now, if you look at that, from a tax perspective, if you hold your equity shares for longer than three years, you will actually start to pay capital gains tax instead of income tax on the investments when you sell them. And remember this everyone your capital gains tax is a quarter proximately of your marginal tax rate and your income tax so that means potentially much lower tax that could repay so that could be a really efficient way then to manage taxes on your investments.
Malika Petersen 24:49
I absolutely love that Arthi. And especially for people that are busy building up their investments for retirement. This is a great way. If you live you Investment long enough, in retirement, you'd be able to draw regularly, let's say monthly from that, and only then pay CGT, which is a quarter of your marginal tax rate. That's a really, really good tip. We've covered quite a bit of ground today, we have around taxes, and some ideas for everybody to think about the tax knowledge and bolding the money to become tax rich. What would our next steps be Arthi with all of this knowledge?
Arthi Rabikrisson 25:30
All right. Well, you know what everyone, it is the start of the new tax year, right? Because you remember 20, February is when we typically the cut off. So let's think about that Eighth Wonder called compounding and all these tips that Malika and I have been giving you since the start of your financial journey and your growth until now. So, as of now, let's think about things like finding a tax consultant, starting to get some advice, or even just asking questions, being more curious, let's call on our financial planners, if you don't have one, I mean, seek them out, ask friends, ask family to recommend someone, but then at the same time, find someone that you feel very comfortable with. Because I mean, we're talking about your money here. And I know it is a sensitive subject for a lot of people to talk to somebody else about their income and their finances. So definitely find someone who you feel comfortable with and get really great advice on how to structure your investments and your retirement portfolios. Well, the other support structure that you could bring in is a financial coach. And a financial coach is somebody who's going to help you uncover the root cause of your money management behaviors, right? So they're going to take you into those habits in those behaviors to help you understand why am I doing things this way. And when you start to get a bit of that unlocking, understanding, that's when you start to work with your planner and your tax consultant to actually then change those habits make it far more productive. It also helps you to bring bring back your confidence, right? Because now you've learned new and improved money habits. So I mean, I think those are all cool, but I'm gonna bring it back to a little bit internal as well. Everyone, just back yourself, okay, believe in your ability that you can learn about these things. And you can take control of your financial affairs, and I think maybe this is the most critical one Malika?
Malika Petersen 27:25
No, I absolutely agree Arthi and and I would add, right, that your your knowledge or your the empowerment around your financial situation is absolutely within your hands. Yes, we can provide many tips and many little nuggets that people can use. But at the end of the day, it is important that each individual understands things like their tax marginal rate, their marginal tax rate, like what can I do to reduce my tax liability? Like, what are the kinds of products that will enhance my income into retirement? All of those things it's really important to understand. So while yes, it is important to get the advice from a financial advisor or financial coach, as Arthi mentioned, I would like to just reiterate, you are the owner, and the biggest advocate of your financial future.
Arthi Rabikrisson 28:27
I like that, thanks for reiterating that thanks for that guidance. It's making me think about growing our moneyverse again, right, everybody? This is all in need of that. That's what we were trying to do. Love it. Love it Malika. Okay, so, with that in mind, what would you like to end off our episode today? Because we've done quite a bit of a download for everybody. So yeah, let's think about how would you close out in terms of a parting shot.
Malika Petersen 28:52
So my parting shot is that the effects of small changes in our lives is extremely powerful. And if we just take the first step, the rest will follow. It's a snowball effect. We do however have to check in with ourselves regularly, and make sure that we are in fact taking those small changes on a regular basis. What about you Arthi? What is your parting shot?
Arthi Rabikrisson 29:19
Okay, I would say, Everyone, don't let taxes get the better of you. So coming back to that control element, right. And I know it seems like it's difficult to understand and I'm sure when you're when you're playing our episode, now, you probably want to go back and listen to some of the other details and examples we've given you. That's okay. All right. Peel back one layer of the onion each time, right, it's as simple as that, like what we've offered you today, it was just one one layer at a high level. Understanding knowledge is powerful because it allows you to take action, and that action can lead to your visions and your dreams becoming reality. Not only for you, but for your family and the generations in your family to come to. So actually, the power is within your control everyone. Oh snap.
