WORRIED about the effect the recently-introduced dividend withholding tax (DWT) will have on your retirement fund? It's not all doom and gloom as there are benefits that will accrue under new tax laws.
According to Johann Grandia, the business development manager at Allan Gray, retirement fund investors stand to benefit from DWT because they will not pay any tax on returns.
The DWT replaced Secondary Tax on Companies (STC) on April 1 this year, leaving many investors concerned about the long-term impact of this tax and the real effect on their investments.
"Our research shows that although the change in the way dividends are taxed will impact your investment, the net effect of the latest change is relatively small," says Grandia.
"Any possible benefit or disadvantage should ultimately be weighed against your objectives, circumstances and risk profile, which should form the basis of your investment planning."
Grandia says retirement fund investors (those invested in a retirement annuity, living annuity and/or preservation fund) will benefit from the change from STC to DWT, because the shift to investor liability for tax on dividends effectively removes this tax for these investors.
Under the current tax regime the tax charge is 10%, and imposed on the company when it declares a dividend. The dividends tax (imposed on the shareholder) was also set to be introduced at a rate of 10%.
But this tax will now be increased to 15%, because the estimated net loss of the switchover from STC to dividends tax - which will amount to R1.9bn - must be mitigated.
The STC credits which would have been available to reduce a dividends tax liability are also reduced from five to three years.
The 15% dividends tax may impact South African individuals, trusts, and non-residents, the latter where there is no or limited protection under a double tax treaty.
The increased tax may irk foreign corporate investors, especially if they cannot access a reduced tax under a treaty, whereas their South African counterparts will not be subject to the same tax.
Government has further proposed that all procedures and rates applicable to withholding taxes must be streamlined and a uniform rate of 15% for other withholding taxes (such as interest) is proposed.
Grandia says: "Even for a retirement fund or a member of a fund with the maximum amount in South African equities the saving will be, once again, fairly small... we calculate a difference of less than 2% in final value.
"All other things being equal, the impact of the change in tax will be to reduce dividend income by a total of 6.5%, which will clearly make a difference to those relying on dividend payments.
"But investment return is not just made up of dividends distributed by equities, it also includes capital growth and income from interest earned."
DWT affects only the dividend portion of the investment's overall return. Therefore, the impact on investment will differ depending on the asset allocation.
The effects of replacing STC with DWT are minimal in a well-diversified discretionary investment, but may be more marked for investors seeking to benefit from the potential for higher capital growth and associated higher dividend yields from equities.