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CGT / Interest exemption from SARS vs TFSA
#1
Hello all.

@Thor (no idea who is on here if not the same but I would imagine everyone else knows) told me to pop in here and ask the question in the open forum based on this discussion we had on MyBB.

https://mybroadband.co.za/vb/showthread....st20955362

Essentially I want to know if the logic and understanding of the CGT / Interest exemptions are correct to facilitate the following.

1. Invest in an interest bearing investment until you hit the R23,800 threshold (So R238,000 at 10% by example).

2. Use that interest to fund your normal investment account until you reach the CGT exclusion R40,000 (this is the one I'm not sure whether I understand it correctly or not).

3. Take that R33,000 of that R40,000 to fund your TFSA accounts and the other R7000 as a nice bonus.

4. Fund your TFSA for  15 years or whatever to reach the maximum and basically be near investment tax free until then outside of dividends.

Am I smoking the good crack?

#2
Mmm...I am not nearly clued up enough but I like the way you think.

Just for my own clarity, what is the main difference between 1 and 2?

I have Dis-Chem share through EasyEquities profile, under which one of the point will that fall?

#3
That's what they said and I reckon it is a daft idea because their main reason for doing it is do that they can have access to the funds that would be stuck in the TFSA otherwise.

That means you are saving wrong and out of your means. Your TFSA is a long term savings vehicle for retirement one day.

University fees, home deposits, general emergencies - these are all things you should be budgeting for and saving for. Saying one needs to keep it outside of the TFSA because you may need comes down to *bad word* please do not do that poor planning (to be blunt).

And I'm not sure if they missed the basic logic and compound growth class, but you want to max out your TFSA as quickly as you can to take advantage of the tax free growth even if it isn't that much. The end goal is to one day switch those growth assets into income assets and the more you have at that point in time the higher the incone is going to be.

Every year you wait that number is getting smaller and you also risk not being able to use it to the maximum one day because you waited to long (the limits will increase).
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#4
(01-15-2018, 04:36 PM)The Local Tourist Wrote: Mmm...I am not nearly clued up enough but I like the way you think.

Just for my own clarity, what is the main difference between 1 and 2?

I have Dis-Chem share through EasyEquities profile, under which one of the point will that fall?

1. Would be an account like Money Market that strictly pays out X amount of interest. Therefore not equity based and not an underlying value of an asset.

2. Would be the profit from the difference between purchasing an equity and selling it again after the longer term and the profit there of. Dis-chem would fall under this if you kept it long enough for it to qualify as CGT.

#5
(01-15-2018, 04:40 PM)Bandit Wrote: That's what they said and I reckon it is a daft idea because their main reason for doing it is do that they can have access to the funds that would be stuck in the TFSA otherwise.

That means you are saving wrong and out of your means. Your TFSA is a long term savings vehicle for retirement one day.

University fees, home deposits, general emergencies - these are all things you should be budgeting for and saving for. Saying one needs to keep it outside of the TFSA because you may need comes down to *bad word* please do not do that poor planning (to be blunt).

And I'm not sure if they missed the basic logic and compound growth class, but you want to max out your TFSA as quickly as you can to take advantage of the tax free growth even if it isn't that much. The end goal is to one day switch those growth assets into income assets and the more you have at that point in time the higher the incone is going to be.

Every year you wait that number is getting smaller and you also risk not being able to use it to the maximum one day because you waited to long (the limits will increase).

Who is this "they" you are referring to?

And also how is it poor planning when the very concept of keeping it out of the TFSA is for the reasons of planning to NOT take it out of that and therefore affect it negatively but instead to keep it in a regular account while dodging the tax?

So it's not poor planning at all, it's the exact opposite. You keep it outside the TFSA because you planned for it and it needs to be pulled out or accessed at some point in the next 20 years. This IS the budget and saving mechanism.

Also how is the compound interest going to be any different if the exact same assets (outside of the interest account of course) would be purchased in the very same values in the very same time lines in different accounts.

Tax Free is Tax Free, whether wrapped in a TFSA or alternatively through an exemption. Percentages and compound interest don't magically change because of the container they are held in.


So I can only imagine you are either Hamster or HavocXphere then arguing the very same point while the entire idea of posting here was to get an alternative view.

Either way the answer still hasn't been provided whether it would be correct or not in that everything would be Tax Free using this method until the TFSA cap is reached.

#6
(01-15-2018, 01:51 PM)SauRoN Wrote: Hello all.

1. Invest in an interest bearing investment until you hit the R23,800 threshold (So R238,000 at 10% by example).

2. Use that interest to fund your normal investment account until you reach the CGT exclusion R40,000 (this is the one I'm not sure whether I understand it correctly or not).

Without talking tax law, there is one gaping hole in the logic simply due to pure mathematics:

Unless you have half a million invested at 10%, it will take more than six months to make the R23,800 interest. But let's say you somehow do make R23,800 in 6 months for example, which will enable it to be invested in step 2 for the next 6 months. Then, you are taking a maximum of R23,800 (as per the first few words of your statement 2) to invest for the next six months to make the R40,000 CGT exclusion amount.

Flaw 1) This means in order for this to succeed, irrespective of your initial investment, your R23,800 investment would have to be earning interest at 336% p.a. (over the six months) to make the R40,000.

Flaw 2) If you were in the position to have half a million to be able to make the R23,800 interest in a few short months, and assuming you were able to get 336% interest on that half million (at the usual 20% tax rate), thus making approximately R1.7 million interest in six months, then would you really care about the R8,000 saved by the double tax saving?

#7
(01-15-2018, 07:22 PM)SaurusDNA Wrote: Without talking tax law, there is one gaping hole in the logic simply due to pure mathematics:

Unless you have half a million invested at 10%, it will take more than six months to make the R23,800 interest. But let's say you somehow do make R23,800 in 6 months for example, which will enable it to be invested in step 2 for the next 6 months. Then, you are taking a maximum of R23,800 (as per the first few words of your statement 2) to invest for the next six months to make the R40,000 CGT exclusion amount.

Flaw 1) This means in order for this to succeed, irrespective of your initial investment, your R23,800 investment would have to be earning interest at 336% p.a. (over the six months) to make the R40,000.

Flaw 2) If you were in the position to have half a million to be able to make the R23,800 interest in a few short months, and assuming you were able to get 336% interest on that half million (at the usual 20% tax rate), thus making approximately R1.7 million interest in six months, then would you really care about the R8,000 saved by the double tax saving?


Sorry maybe I should have specified that there isn't 250k to start out with here and it's rather that of an average wage earner at a couple of grand a month.

Let's say the TFSA limited about of R2750.

But either way even the starting point is irrelevant as the relevance of the question is rather the point at which you are making R23800 a year in interest and/or the the CGT exclusion value and how do you plan for it.

When you've got 250k sitting in either of the three styles of funds it's already way too late. This question relates to when you are at zero or at the very least far from it being enough to become a tax burden.

The entire concept is how do you plan your investment to be tax free or rather tax efficient for as long as possible by applying the correct logic when starting out and then whether this approach is correctly understood from a SARS perspective, possible and of course also legal.

Also it's not six months but annual.

So you say have money only in a CGT "friendly" investment until such time as it becomes tax bearing.

When that happens you make use of your tax exclusion to withdraw the money for that Tax Year and then start funding the interest bearing account.

Now you start funding the interest bearing account until such a point where there is a tax issue or rather you start hitting the TFSA R33,000 limit and you start investing in that.

Or you take a nice annual income bonus and fund the TFSA with the rest.

Or you just keep investing the overflow and pay the tax.

Either way this is not aimed at someone who has too much and can't possibly escape the tax but rather someone still in the wealth building phase.

You could of course do all three options in parallel as well depending on your goals.

My deepest question is still unanswered though and that's whether the CGT exclusion works the way I think it does.

The simplest math would be to start with the interest bearing account that has a static interest rate that you could limit the annual balance to an almost exact figure of interest and then fund the rest from there.

Then you could take that Tax free sum combined with the monthly contribution you were making to it to fund your CGT based portfolio.

TLDR; This isn't a get rich quick scheme and doesn't relate to six months. It's about tax year to tax year over twenty or more years and using a base input of a couple of thousand a month to build wealth.

If I had half a bar to invest I probably wouldn't be asking this here and just pay a tax dude to do it for me. Smile

#8
I dunno how else to explain it. You can only fill up your TFSA at a certain rate. If the assets in it need to produce income you need as much of it in there as possible. Income from within a TFSA will have a major tax benefit over income from outside of a TFSA.

It's actually a pretty straightforward concept.
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#9
Here's a illustrative screen capture of a graph from Standard Bank's online tutorials (albeit from an earlier tax year when it was still a 30,000 annual limit). The tax benefit only really starts making a noticeable difference from 5 years into the investment, but at 25 years, when the lifetime contribution is fully utilized and the tax benefit compounded, the difference in returns is huge.

JSE Finance Forum Attachment - Filename: Capture.JPG   

#10
(01-15-2018, 09:07 PM)Bandit Wrote: I dunno how else to explain it. You can only fill up your TFSA at a certain rate. If the assets in it need to produce income you need as much of it in there as possible. Income from within a TFSA will have a major tax benefit over income from outside of a TFSA.

It's actually a pretty straightforward concept.

It is very simple to understand and there is no problem understanding that.

What you fail to acknowledge is that there is an inherent disadvantage to all the money being locked into the TFSA otherwise the advantage of it falls away.

Income that cannot be touched until a given period of time has no benefit at all when that income is required in the shorter term to be used otherwise.

Different goals have different requirements. There isn't a one size fits all for everyone, yet you punt TFSA exactly as such.

And still the CGT exemption question hasn't been answered or corrected to verify that it is accurate or not.

#11
(01-16-2018, 08:33 AM)SaurusDNA Wrote: Here's a illustrative screen capture of a graph from Standard Bank's online tutorials (albeit from an earlier tax year when it was still a 30,000 annual limit). The tax benefit only really starts making a noticeable difference from 5 years into the investment, but at 25 years, when the lifetime contribution is fully utilized and the tax benefit compounded, the difference in returns is huge.

And a fair example it is.

However it is an either/or example only.

Where is the example when the two are combined with contributions that go beyond the TFSA limits over the period?

More so where is the example of money pulled out of either fund and the net result of it not being able to returned to the TFSA portfolio? Are you starting to see why the TFSA isn't a one-size-fits all solution especially when funds are limited and you don't just assume that everyone will cap it instantly?

For that matter if that graph is the gospel you are going to invest by then you need to add a third alternative of throwing all your longterm savings into an RA at 27.5% and using the tax deductions from that to fund the TFSA to really see the highest benefits.

It really becomes a "how long is a piece of string" thing that will vary from application to application.

#12
(01-16-2018, 11:26 AM)SauRoN Wrote: For that matter if that graph is the gospel you are going to invest by then you need to add a third alternative of throwing all your longterm savings into an RA at 27.5% and using the tax deductions from that to fund the TFSA to really see the highest benefits.

The TFIA account is going to get R33,000 put into it per annum irrespective of whether it's from my monthly salary or from my RA tax rebate.

Because of the R33,000 limit, it makes no difference where the money comes from. That is simply an accounting matter, but the total tax saving (in Rands) remains the same irrespective of whether it's tax free RA money that has been re-invested or salary money that is being invested in TFIA.

#13
The TFIA is much, much better, because the tax savings is uncapped. Only the contribution is capped, but theoretically, you could make a billion Rand tax free if you have a shares that grow by a million percent, for example.

On the other hand, with CGT exclusion, the amount you're going to save on tax is capped at 18% of R40,000 (ie. R7200), irrespective of how much more you make.

The TFIA is therefore the clear favourite for growth over the long term - because you automatically have 20% of your total growth re-invested each year, compounded for many years - not just the tax saving on R33,000.

#14
For that matter, this is also a serious flaw on your logic in the original post:

If you took the interest from the tax free investment and reinvested it in the normal savings account , you're going to make R7,200 no matter what because the exempted amount is capped, no matter what the source is of the money.

If you left it in the TFIA, it would have scored tax on all it's growth forever.

You are going to make an exact amount R7,200 if you put in new cash into a normal investment account as well, because its the cap for capital gains exemption, so there is no second saving on re-investing the tax free money. The only thing that happens if you withdraw the TFIA interest and reinvest it for the capital gains benefit, is that you lose ALL the tax free benefit of the growth of that interest, because you would have made R7,200 anyway.

#15
(01-16-2018, 12:06 PM)SaurusDNA Wrote: On the other hand, with CGT exclusion, the amount you're going to save on tax is capped at 18% of R40,000 (ie. R7200), irrespective of how much more you make.

Can you explain this 18% calculation? I was understanding it rather that the first R40k (as in profit from the sale of your shares) is tax free? Which is why I came here to ask the question as it wasn't clear if it's the same as the interest exemption or not.

Not arguing that the TFSA isn't a great vessel, so long as you are happy to leave the money all in there and don't touch the capital until you are well into retirement. 

It's purely a longer term investment strategy...but what about the short term?






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