Will Sars penalize my children for the investments I have made on their behalf?

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Thanks for your question. For the purposes of this answer, we have assumed that your children will earn taxable income from next year and hold the trust funds in their personal name.

The South African Revenue Service (Sars) recently announced that if all of the criteria below apply to an individual, then there is no need to submit a tax return:

  • Your total employment income for the year is less than R500,000;
  • You only received employment income from one employer;
  • You do not have car allowance / company car / travel allowance or other income such as rental income or interest; and
  • You are not asking for tax deductions / rebates such as medical expenses or contributions to a retirement pension.

If you are still unsure whether or not a declaration needs to be completed, there is another set of criteria that goes into more detail.

The list below is specific to what would apply to a natural person holding an investment in a trust.

A tax return must be completed if:

  • You have earned interest in excess of the annual exempt amount of R23,800 for a person under 65;
  • You hold funds in a foreign currency or assets outside of South Africa that have a combined total value of R250,000 in the fiscal year; and or
  • You have a realized capital gain or loss (change of funds or withdrawal) during the tax year exceeding R40,000.

As such, looking at the criteria above, if none of your children’s investments in mutual funds have exceeded the thresholds mentioned in your question, then they will not be subject to tax. Even if interest / dividends were previously reflected on your tax returns, and assuming that since 2016 no tax returns have been submitted for your children, the fact remains that no tax has been filed. ‘was due and that there was no criteria that required them to submit an income tax return. return and, therefore, no penalty would apply to your children.

Going forward, it’s important to understand what types of income attract different asset classes, and these are listed in the table below followed by an explanation of how each will be taxed.

Asset class Interest income Dividend income Property income
Equity No Yes No
Goods No No Yes
Obligations Yes No No
Cash Yes No No

Interest income

This interest income is subject to income tax and is taxed at your marginal tax rate. Individual taxpayers enjoy an annual exemption on any South African interest income they earn, set by Sars each year. This exemption is R23,800 for people under 65 and R34,500 for people 65 and over.

Dividend income

For shares (excluding listed real estate companies), you will be subject to withholding tax (DWT) on the dividend income they pay. A 20% DWT is withheld from your dividends before they are paid or reinvested.

Property income

Reits, or real estate investment trusts, are taxed differently from other listed companies. They do not pay corporate tax, and their investors do not pay DWT on the distributions they make. Instead, investors pay income tax on the distributions they receive from these investment companies at their marginal income tax rate.

What about the capital gains tax (CGT)?

Another tax associated with investing in mutual funds is CGT. A capital gains event is only triggered when you decide to sell or trade (some or all) of your investments (such as units of a mutual fund). If the price of the units has increased since you invested, this increase in value is called a gain (or loss if the value has fallen). Currently, only 40% of this capital gain (and not the total gain) is included in your annual income; so that the maximum CGT rate for individuals paying the maximum marginal tax rate of 45% is 18%. Individual taxpayers benefit from an annual capital gain exclusion of Rand 40,000.

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