Tax creep (#235)

There’s more than one way to raise taxes. You can subject yourself to the ire of the masses by being up-front about it, or you can eke out little tax wins on the sly. Our government likes to do a bit of both.

This week, with the help of Wesley, we explain how tax creep works and what you can do about it. We also talk about lump-sum withdrawals. You are taxed on previous withdrawals taken after the following dates:

• Withdrawals: 1 March 2009
• Retirement benefits: 1 October 2007
• Severance benefits: 1 March 2011

If you took lump sum withdrawals before these dates, consider that an entry for your gratitude journal.

Wesley 

It’s been 6 years since the lump sum benefit was last adjusted and we have lost 26.5% of the value of the incentive during this time. Where is my inflation adjustment? Obviously someone is desperate for cash right now, and SARS doesn't think it is pensioners.

When the lump sum is adjusted from 300k to 500k, but you already took 300k in the past, what happens when you take a 200k lump sum from your other RA account?

More complicated. Was 300k, take 400k, pay 18% tax on 100k = 18k tax. Now the limit is 500k. take another 300k lump sum from your other RA account.

What on earth happens?

Do you not get any benefit from the increase?

Does 100k at 18% wipe out half of your new 200k tax free lump sum?

Or do you treat it as a 700k lump sum on the new provisions less 18k tax previously paid on lump sums.

It seems like a good idea to have at least 2 RA accounts.

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Win of the week: Candice

Just thought I'd say a HUGE thank you.  After being introduced to the show just 3 years ago, I feel like we are in a committed relationship. It's the only podcast I listen to and look forward to my Monday morning drive to work with you guys. 

I finally budgeted.  I’m horrified to see where our money goes monthly.  I can't complain though, because without knowing I wouldn't be able to change spending habits.

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Martinus

I've always championed Total Return ETFs. Outside a TFSA you’d have to pay Capital Gains Tax. TRTs also save on brokerage costs and admin. However, the feedback from De Wet has me reconsidering that approach.

If the fund is a feeder fund like the Satrix MSCI World, is there any local tax event? To me, it makes sense that if they just reinvest the distributions they receive outside SA the only tax event would be in the foreign country. Your only local tax concern then is CGT.

It is possible to switch from Satrix to 1invest MSCI world at an increase in fees of 0.05% and then have dividends paid out. This leaves an increase in brokerage costs and personal admin. 

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Martin 

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