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Thursday, January 18, 2024

A tale of two tax breaks: A look at RAs and solar investments

*This content is brought to you by Futureneers ↗

In the South African investment landscape, savvy savers have traditionally turned to Retirement Annuities (RAs) for tax relief and future financial security. However, recent trends have prompted a re-evaluation of these traditional investment vehicles. Criticisms of RAs centre around their modest returns and not-so-modest fee structures, compounded by a narrowing investment scope on the JSE and ever-stringent regulations.

“Enter Section 12BA solar investments, a novel tax-efficient opportunity that’s gaining traction among local investors. This option shines with its attractive 125% tax deduction on offer for the next two tax years”, says James Rothmann, a director at Futureneers Energy.

Let’s look at the choice between the conventional RA and the innovative solar investment option, specifically for a taxpayer at an effective 45% maximum tax rate.

To demystify this decision, let’s consider a hypothetical scenario: an individual earning R2.5 million in the 2024 tax year, exploring investments in either an RA or the Futureneers 12BA Portfolio, each with a R350,000 commitment.

Investing in an RA, the tax saving amounts to R157,500. In contrast, a 12BA solar investment offers a substantial tax saving of R300,000. This initial comparison already positions the solar option favourably in terms of immediate tax efficiency.  This after tax investment is referred to as the Capital at Risk, which needs to be used as the fundamental basis to evaluate future returns.

While RAs traditionally offer no immediate income, the 12BA solar investment begins yielding returns from the outset. Over a seven-year period, the income from solar investments is projected at around R120,000, though this is subject to significant taxation. After seven years, the expected sale of the solar assets for R145,000 will incur R65,000 in taxes, reflecting their depreciative nature.

Conversely, a withdrawal from the RA after seven years would result in approximately R370,000* in-hand, equating to a net gain of R177,500 – about 1.9 times the initial investment at risk, with a 9.75% return (After Tax IRR).

The solar investment scenario presents a lower initial risk capital outlay of R50,000 (after tax benefits) and a projected post-tax return of R120,000, translating to 2.4 times the investment with a conservative 15% return (After Tax IRR).

The advantages of solar investments are multi-fold: a reduced initial capital risk and the flexibility to invest beyond the R350,000 cap associated with RAs. This not only augments potential returns but also contributes to addressing the country’s energy challenges.

In summary, the 12BA Solar structured investment on offer from Futureneers present three major advantages compared to the traditional RA:

  1. There is no limitation of investment amount, while an RA is limited to R350,000 per year.  This also provides the higher earning investor an opportunity to make an RA investment as well as a 12BA Investment.
  2. It “de-risks” the investor with a year 1 tax benefit of 85% of the total investment amount  in the example above versus the 45% tax benefit of the RA.
  3. The overall after tax returns over 7 years exceed that of the RA.

As the South African investment landscape evolves, understanding and aligning with these emerging opportunities becomes imperative for informed investors. The introduction of instruments like Section 12BA is reshaping the narrative, blending fiscal prudence with societal responsibility, a compelling proposition for the forward-thinking investor.

* Assuming CAGR of 7.4% and an effective tax rate of 36%.

For more information, click here ↗.

Disclaimer: Investments are subject to market risks and the terms and conditions of the fund. Please read them carefully before investing.

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James Mackreides
James Mackreides
'Mac' is a short tempered former helicopter pilot , now a writer based in Sofia, Bulgaria. Loves dogs, the outdoors and staying far away from the ocean.

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