You can also listen to this podcast on iono.fm here. ADVERTISEMENT CONTINUE READING BELOW BOITUMELO NTSOKO: I recently read a Bloomberg article on how losses in your investment portfolio can boost returns and cut taxes. The strategy, called tax-loss harvesting, looks to help investors improve a portfolio’s after-tax returns and offset ordinary income.
To a large extent, this can be used to plan your restructures in your portfolio to either not incur any tax at all, or what we do is we try to time it correctly with using financial years, or with using different components of your portfolio. Let’s say there are components that had large gains but there are also components that had losses.
There are other benefits when you use some of the other entities. Let’s say it’s a company or specifically a trust, now you have multiple beneficiaries you can work with as well. Or, for example, you want to decrease your local exposure and increase offshore exposure, again selling off assets, or you want to access some of your investment and want to withdraw a component of your investment – in all of these scenarios, you’re going to trigger capital gains tax. So by optimising this R40 000, firstly it can always be calculated to what the tax effect would be.
Ultimately when it comes from an asset management point of view, the goal is never to get a tax benefit, the goal is to get a higher return or to buy a better asset or better equity in the portfolio. But of course with it comes tax implications. I would always ensure before I make a decision on anything that would be the sale of an asset. So a rebalance or a withdrawal or anything, first know what the capital gains tax reaction would be because a lot of investors don’t always know there’s a capital gain tax reaction. Should you, for example, withdraw from your investment or switch funds, that’s important to know. And when you first calculate it you can also make an informed decision as to whether it is worth it.
On the other side I would also recommend that of course in the short term on an annual basis this is always calculated and planned for, that you know what the implications will be. As I mentioned, let’s say we want to make a specific portfolio adjustment, we can for example make one change in February and one change in March, and automatically we are optimising two financial years and therefore two different exclusions – and protecting you from the tax effect on that side.
ELKE BRINK: Yes, definitely. I think when it comes to tax planning there are always a few pitfalls and I think I would always include proper advice on it. This anywhere normally only applies to larger portfolios when you are triggering tax. I think it’s important to really do an analysis on it. And then the last thing, which is quite big in South Africa, and kind of ties in with the other point, Sars is very effective when it comes to anti-avoidance when it comes to tax, whereas it’s not always so big in the US, for example.
ELKE BRINK: I think with the concept of robo-advice or maybe even artificial intelligence and everything where the world is going, it’s always just important to know that the decision-making really fits in with your holistic planning.