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Thread: Unemployed but earning interest: When does tax start?

  1. #1
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    Question Unemployed but earning interest: When does tax start?

    Consider an unemployed citizen, like a full-time student, that has
    an investment generating interest, like in a bank savings account.

    If the student earns R22,800 interest in a tax year, then there should
    definitely NOT be tax to be paid, because R22,800 interest is exempt.

    However, if the student earns R59,749 interest in a tax year, and no other
    income at all, then should he pay tax?


    Consider that only at R59,750 income does the liability for tax commence, and
    then he should pay 18% on R59,750-R22,800=R36,950 which is R6651 tax.
    Is this correct?


    Let's say that the unemployed student has a JSE stock investment as his
    only source of income, which generates an effective 4% dividends pa and 3% interest pa
    in the tax year.
    Then given that he never sells any stocks (so no CGT), what would be the
    maximum stock value he could have without having to pay any taxes?



    If it is true that national dividends are tax-free in the investor hands, then
    only the 3% interest pa could be taxed. And then only if it produces
    income of R59,750 or more in the tax year.

    Then the maximum stock value would be R59,749.99/0.03=R1,991,666.33
    where he would not have to pay any taxes.

    If his stock value increases to R59,750/0.03=R1,991,666.67, then
    he would have to pay taxes on R1,991,666.67-R22,800=R1,968,866.67
    which would amount to R168,250+40% of (R1,968,866.67-R580,000)
    which equals R723,796.67.

    So an increase of only 34 cents in the stock value would suddenly
    make the student liable for R723,796.67 in taxes.


    Have I made an error or incorrect statement in this analysis? Thank you
    for the help.

  2. #2
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    Quote Originally Posted by JohnApple View Post
    If his stock value increases to R59,750/0.03=R1,991,666.67, then
    he would have to pay taxes on R1,991,666.67-R22,800=R1,968,866.67
    which would amount to R168,250+40% of (R1,968,866.67-R580,000)
    which equals R723,796.67.

    So an increase of only 34 cents in the stock value would suddenly
    make the student liable for R723,796.67 in taxes.
    Apologies, I got carried away, this is incorrect.

    The interest income would then only be R59,750 and he would have
    to pay R6,651 in taxes.

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    You only pay tax on income and capital gains. So no, you would not pay tax on growth until you realise the capital gain by selling it.

    Dividends are not tax free. They are taxed at 15% from 1/4/2012 but are deducted from the dividends by the paying party and paid to SARS. However it is the recipient that is taxed, not the company.

    The tax threshold is independent of source.

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