Through its newly launched retail bonds, the government is offering you the opportunity to earn interest at rates higher than those offered on bank fixed deposits and to invest without costs.
The government announced last month that it will pay interest of between 9.25 percent and 10 percent on the retail bonds for the full investment term, depending on whether you invest for two, three or five years. These rates will apply to anyone who buys a retail bond before the rates are revised a month after the launch.
It appears there is another advantage to investing in the RSA Retail Bond. Kristen McClarty, a manager in the Cape Town office of Deloitte's tax services division, says you may be able to defer some of the tax you may owe on the interest earned.
McClarty says that, according to a South African Revenue Service media release, interest on the RSA Retail Bond will be paid at six-monthly intervals at the end of March and September every year and at the end of your investment term.
In addition, McClarty says, the media release states the interest you earn will only be taxable at the six-monthly payment date - that is, when the interest has been paid to you or reinvested for you. This means that if you invest now, in June, you will only pay tax on the interest you receive to the end of September.
The interest you earn between October and February will only be paid to you at the end of March 2005, which falls after the 2004/5 tax year closes at the end of February. Therefore, you will only pay tax on this interest in the 2005/6 tax year.
If you only invest in the bonds in October this year, your first interest payment will be in March 2005, and you will not pay tax on the interest you earn on the retail bond investment in this tax year.
You should also remember that all taxpayers under the age of 65 enjoy a tax exemption on interest income they earn up to R11 000. Taxpayers over the age of 65 can earn up to R16 000 in interest income before they have to pay tax on that interest.
If you are not using your interest exemption for interest income earned on any other investments, it means that if you are under the age of 65, you can invest as much as R110 000 in the five-year retail bond and earn the interest at 10 percent a year without paying any tax. If you are 65 years or older, you can invest as much as R160 000 in the five-year bond without paying any tax.
Any interest you earn over and above these tax exemptions is taxed at your marginal rate of income tax.
At the end of the term of the bond, McClarty says, you will be repaid your capital, and there should be no income tax or capital gains tax implications because the capital amount should be the same as what you put in.
- If you want to invest in the RSA Retail Bond, you can go to your local post office, phone 012 315 5888 or visit www.rsaretailbonds.gov.za