Oran Hall | There is life even with taxes
As good and responsible citizens, it is incumbent on us to pay our taxes, not just on income from employment, but from investment activities. Taxes leave us with less to spend, save, and invest, but there are legitimate ways by which we can reduce...
As good and responsible citizens, it is incumbent on us to pay our taxes, not just on income from employment, but from investment activities. Taxes leave us with less to spend, save, and invest, but there are legitimate ways by which we can reduce the taxes we pay.
Taxes often affect us directly. Other times they do not such as when levied on the profits that companies make. This applies to listed companies and unlisted companies, even the companies that individuals establish and which do not trade on any market – the stock market or the over-the- counter market.
Investors are affected in the sense that the amount of taxes that a company pays affects its net profit. High tax rates lead to lower net profits, and lower tax rates lead to higher net profits. In the case of listed companies, this generally affects the dividends paid and the market price of the shares.
Nevertheless, there are other factors that affect the level of dividends paid and the market price of the shares. Dividend payments may be constrained by the dividend policy of a company, and share prices are usually affected by market conditions.
In any case, experience shows that stock prices tend to respond to changes in tax policies relating to dividends, increasing when tax rates decrease and falling when they increase. This is so because of the effect such actions have on the demand for the shares, particularly for investors who place importance on the dividends they derive from their investment.
Ordinary dividends paid by Jamaican tax-resident companies to Jamaican tax-resident shareholders are liable to tax at the rate of 15 per cent, deducted on payment by the distribution company.
But there are tax advantages for investors who own shares in listed companies: listed shares transferred on the Jamaica Stock Exchange (JSE), including the junior stock exchange, are exempt from transfer tax, and there is no capital gains tax in Jamaica, so their profits are not taxed. Additionally, although stamp duty is payable on the transfer or disposal of unlisted shares and property, listed securities that are transferred on the JSE are exempt from stamp duty.
In terms of taxes and other government charges, shares listed on the stock exchange have some clear advantages, which must be weighed carefully against the higher risk associated with them.
For investors desiring to benefit from the advantages associated with listed stock, a good alternative would be capital growth unit trusts and mutual funds, which invest in equities, also called ordinary shares or ordinary stock. The gains are not taxed, and they are generally easier to convert to cash than ordinary stock though there are cases in which lock-in rules may limit the ability to sell within a specified period after the purchase. This tends to be 90 days.
Among the unit trusts and mutual funds, the money market, fixed income, and bond funds also give investors a tax advantage but only to the extent that they meet the terms of the LSAs or long-term savings accounts. These are: the maximum sum that can be invested in a year to earn the benefit is one million dollars, the funds must remain invested for five years, and no more than 75 per cent of the income that is earned can be withdrawn in a year.
LSAs are also offered by deposit-taking institutions like commercial banks through certain deposit accounts.
Life insurance companies, through the equity-linked and interest-sensitive policies they offer, also present the opportunity to earn tax-advantaged income. The portion of the premium that is invested may go into a capital growth, income, or blended fund.
The primary objective of these products is the protection that life insurance offers, but they provide additional cash for beneficiaries or for the insured, to whom the additional cash flow tends to be very useful the later years of life. The main disadvantage of these policies is that the returns are not guaranteed.
But there is another significant source of income for the last phase of life – retirement. Registered pension plans and retirement schemes offer two major benefits: the contributions their members make to them from their employment income are not subject to income tax, neither is the income that they earn while they remain invested.
At retirement, however, the pensioner is required to pay income tax on the amount above the tax threshold and allowances for old age and being a pensioner.
There are opportunities to make tax-efficient savings and investment decisions during the working years and the retirement years as well. Properly utilised, much income can be generated to sustain life during the working years and beyond.
- Oran A. Hall, author of ‘Understanding Investments’ and principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and email@example.com