7 Investments to consider – and how they are taxed

When you’re looking for an investment that will grow your hard-earned savings, there are many options to consider. Each of them comes with tax implications that should inform your decision.

We have a look at a list of investments that may be of interest to you, and we outline the tax implications of each. 

Tip: Did you know that you could open a tax-free savings account? Find out more.

Investment types and tax implications

Sheila-Ann Robey, financial adviser at Lifeguards, an affiliate of Liberty, outlines some noteworthy investments and their tax characteristics.

1. Tax-free savings or investments

This is the only real tax-free vehicle offered by various financial institutions, such as the bank, investment houses, and investment platforms.

These vehicles have certain limits, including a maximum annual investment of R36,000 - or R3,000 per month - and R500,000 over an individual’s lifetime. There is no tax on interest earned, or any other tax implications, such as capital gains tax.

It’s advisable to use a high-interest-bearing fund over a longer period to maximise the tax-free advantage.

For example, if a 30-year-old individual maxed out their tax-free allocation each year, it would take 13.8 years to reach the R500,000 lifetime cap. At an assumed 10% interest rate, by the time they reach age 65, they would have accrued more than R7 million unencumbered by tax.

2. Fixed deposit

This savings vehicle is generally offered by banking institutions. It’s an investment of a fixed amount for a fixed period with a fixed interest rate. A fixed deposit is not a tax-free investment because both the interest earned and withdrawals are subject to tax.

3. Unit trusts or collective investment schemes

These investments attract fluctuating interest rates, based on the underlying unit prices of the funds that are invested. Unit trusts are subject to interest tax and capital gains tax, along with any other income you received from the investment, such as dividends.

The interest tax exemption for 2022 is R23,800 for those who are aged under 65 years, which means the interest earned on all of your investments below this threshold will not be taxed.

Similarly, the capital gains tax exemption is R40,000 for individuals; other than for the sale of a primary residence, for which the threshold is R2 million.

4. Retail savings bond

This investment lies with the government and it earns fixed interest – or inflation-linked interest – over the term of the investment. You will pay taxes on the interest you receive from this investment. 

5. Endowments

These savings vehicles usually have a five-year term or longer, and they are taxed according to the five-funds approach. This means that the tax for this investment is paid to the South African Revenue Service (SARS) on your behalf. As a result, these funds attract higher fees.

However, after the term of the investment, there are no tax implications for the policyholder. These investments are suitable for consumers who find themselves in a higher tax bracket.

6. Linked investments or Linked Investment Service Provider (LISP)

This is, essentially, a multi-unit trust investment and the same tax implications apply as described for unit trusts.

7. Exchange-Traded Funds (ETFs)

These investments are based on a basket of shares or securities that are bought and sold on the stock exchange. ETFs are subject to capital gains tax when sold. Note that the total individual exemption of R40,000 per annum still applies.

“Everyone has different investment objectives, and a trusted financial adviser can assist in this regard. But the rule of thumb with any investment strategy is to diversify,” says Robey.

Have a look at the unit trusts and tax-free savings accounts available through JustMoney.