Article
How to Take Advantage of Tax Season
Taxes don’t have to be complicated. In this short guide, Lebogang Phuti-Thornton keeps things simple so you can easily take advantage of the tax breaks from SARS.
6 min read
And just like that, 2024 is upon us and before you know it, the tax year comes to an end. While the month of Janua’worry’ feels like it is dragging on forever, it’s important to note that there is still a bit of time to optimise the tax breaks available to South Africans before Leap Day rolls around. In this updated article (published in its original form last year), we highlight a few options that could lighten your tax load come returns time.
When planning how to better structure your finances, to make the most of the tax incentives the South African Revenue Service has in place, there is no better time to start than now. Even if the benefit on your tax bottom line might not be as significant this year (given that there is only one month left of the tax year), you will reap the rewards in years to come.
A famous quote, more than three centuries old, from the government of French King Louis XIV Jean Baptiste Colbert, says: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
Here is a simple guide to keeping a few more feathers from the goose in your pocket.
Optimising your investment products
Two main investment products exist that are designed specifically to make it easier for you to maximise your tax savings. Let’s think of them as the golden eggs from the abovementioned goose.
1. Contributing to a retirement annuity fund
What is a retirement annuity fund (RA)?
An RA is a tax-efficient investment vehicle that you can use as an individual who is looking at ways of saving toward your retirement. Contributions are flexible so you can make a lump sum payment or set up a monthly debit order. You can also make additional contributions to an RA over and above any existing pension or provident funds that you may already be participating in through your employer. There are several underlying assets you can invest in through your RA with the help of your financial adviser, subject to the limitations of Regulation 28.
How does it save me on taxes?
The great thing about RAs is not just that they are exempt from any capital gains, income, and dividend tax but also any contributions that you make to an RA are deductible from your taxable income, effectively reducing your tax liability.
However, there is a limit on your contributions towards an RA: 27,5% of the greater of your taxable income or remuneration (to a maximum of R350 000 per year). This limit applies to the total contributions you make to any pension, provident, or retirement annuity fund during the tax year. The tax deduction will always be limited to the actual contributions that you have made. If you contribute above the allowable annual limit, not to worry, any excess contributions will simply be carried over to the next year.
This is not only an effective way of reducing your taxable income but it is also a great way to save for your retirement. The good news is, that on retirement, if you have any excess contributions that have rolled over, you can offset tax payable on, for example, lump sums you want paid out in cash (read more).
We can look at a simple example below to explain how it works:
Let’s say you are earning R200 000 in income per year and you contribute 10% (R20 000) towards your RA, you will only be taxed on your income less your RA contributions (R200 000 – R20 000 = R180 000). If you were to contribute 15% (R30 000) you would only be taxed on R170 000 (R200 000 – R30 000), so the more you contribute, the more you save.
I have already paid tax on my full earnings. What does this mean for me?
If you are an employee who has already paid tax on your total earnings through P.A.Y.E. (pay as you earn), you may qualify for a refund.
2. Open or top up a tax-free savings account
What is a tax-free savings account (TFSA)?
A TFSA is another great way of investing money towards your future while being tax savvy at the same time. You may contribute up to a maximum of R36 000 per tax year (1 March to end February) as well as a lifetime contribution limit of R500 000. You can spread your contributions across as many savings accounts as you want, but you must always make sure that you don’t invest more than the total of R36 000 for the tax year. Important to note is that every person in your family, including minor children, has this individual limit.
As an example:
If you’ve already contributed R20 000 to one tax-free savings account for the period, you’ll only be able to invest a maximum of R16 000 in any other accounts you may have. A TFSA is a great savings vehicle but there are three very important things to note:
How does it save on taxes?
What makes a TFSA unique from other discretionary savings and investment accounts like unit trusts, is that all returns including the capital gains, income, and dividends earned within your TFSA are tax-free! This means that you will not be liable to pay tax on the growth of your investment or when you decide to withdraw money from your account.
What other tax-saving options are available to South Africans?
You may already be contributing to an RA or TFSA, or have reached the maximum allowable contributions for the tax year and are wondering if there are any other ways for you to save on your tax bill. The answer is, yes there are!
1: Join a medical aid scheme
What is a medical aid scheme?
A medical aid scheme is a non-profit organisation that provides financial cover for the medical expenses of its members. In a medical aid scheme, members pay a monthly amount called a contribution that is safeguarded and administered by the scheme. This money is then used to pay out medical claims and covers members’ healthcare costs such as hospitalisation, treatments, and medicine.
How does it save on taxes?
As part of the medical scheme’s fees tax credit, SARS will give you a fixed monthly tax credit of R364 for you as the primary medical aid scheme member,R364 for your first dependent, and then R246 for each subsequent dependent. This is a flat rate per month and does not consider your taxable income but is rather a direct deduction of your tax liability.
Let’s look at a simple example below:
Say you are part of a four-person household with a spouse and two children, your tax credit will be calculated as follows: Main member:R364; first dependent (spouse): R364; child 1: R246, and; child 2: R246. This means that the total tax credit per month will be equal to R1220, or R14 640.
What does this mean for you?
It means that your tax liability for the tax year will be decreased by R14 640. If your tax liability is less than your medical aid tax credit, your tax liability will be reduced to zero and you will not owe SARS any money. You will not be refunded the difference.
2. Donate to a registered public benefit organisation
What is a public benefit organisation (PBO)?
A PBO is a non-profit organisation that is registered with SARS that is exempt from paying taxes on the donations it receives. A Section 18A-approved PBO has received extra exemption allowing donors to also benefit from tax-deductibility.
How does it save on taxes? Donations made to a registered Section 18A-approved PBO are tax deductible on up to 10% of your taxable income.
Example:
If your taxable income is R200 000, the deduction you can claim from SARS for the donation made is limited to R20 000. If you donate less than the limit, then the actual amount of your donation will be used to reduce your taxable income. If you exceed this limit, the excess amount will be carried over to the next tax year. It’s important to note that not all charities have PBO status and you should make sure that you are donating to a PBO that is registered with SARS to capitalize on this Section 18A exemption. You should also keep a record of your donation (check the requirements for PBO receipts issued here – section 11). This is a great way for you to contribute towards a worthy cause while also saving on the amount of taxes you pay.
You can search here for SARS-approved Section 18A PBOs.
And there you have it – plenty of time left to capitalise on some of the options listed above. Speak to your financial adviser or service provider today to confirm the cut-off dates for accepting instructions.
When planning how to better structure your finances, to make the most of the tax incentives the South African Revenue Service has in place, there is no better time to start than now. Even if the benefit on your tax bottom line might not be as significant this year (given that there is only one month left of the tax year), you will reap the rewards in years to come.
A famous quote, more than three centuries old, from the government of French King Louis XIV Jean Baptiste Colbert, says: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
Here is a simple guide to keeping a few more feathers from the goose in your pocket.
Optimising your investment products
Two main investment products exist that are designed specifically to make it easier for you to maximise your tax savings. Let’s think of them as the golden eggs from the abovementioned goose.
1. Contributing to a retirement annuity fund
What is a retirement annuity fund (RA)?
An RA is a tax-efficient investment vehicle that you can use as an individual who is looking at ways of saving toward your retirement. Contributions are flexible so you can make a lump sum payment or set up a monthly debit order. You can also make additional contributions to an RA over and above any existing pension or provident funds that you may already be participating in through your employer. There are several underlying assets you can invest in through your RA with the help of your financial adviser, subject to the limitations of Regulation 28.
How does it save me on taxes?
The great thing about RAs is not just that they are exempt from any capital gains, income, and dividend tax but also any contributions that you make to an RA are deductible from your taxable income, effectively reducing your tax liability.
However, there is a limit on your contributions towards an RA: 27,5% of the greater of your taxable income or remuneration (to a maximum of R350 000 per year). This limit applies to the total contributions you make to any pension, provident, or retirement annuity fund during the tax year. The tax deduction will always be limited to the actual contributions that you have made. If you contribute above the allowable annual limit, not to worry, any excess contributions will simply be carried over to the next year.
This is not only an effective way of reducing your taxable income but it is also a great way to save for your retirement. The good news is, that on retirement, if you have any excess contributions that have rolled over, you can offset tax payable on, for example, lump sums you want paid out in cash (read more).
We can look at a simple example below to explain how it works:
Let’s say you are earning R200 000 in income per year and you contribute 10% (R20 000) towards your RA, you will only be taxed on your income less your RA contributions (R200 000 – R20 000 = R180 000). If you were to contribute 15% (R30 000) you would only be taxed on R170 000 (R200 000 – R30 000), so the more you contribute, the more you save.
I have already paid tax on my full earnings. What does this mean for me?
If you are an employee who has already paid tax on your total earnings through P.A.Y.E. (pay as you earn), you may qualify for a refund.
2. Open or top up a tax-free savings account
What is a tax-free savings account (TFSA)?
A TFSA is another great way of investing money towards your future while being tax savvy at the same time. You may contribute up to a maximum of R36 000 per tax year (1 March to end February) as well as a lifetime contribution limit of R500 000. You can spread your contributions across as many savings accounts as you want, but you must always make sure that you don’t invest more than the total of R36 000 for the tax year. Important to note is that every person in your family, including minor children, has this individual limit.
As an example:
If you’ve already contributed R20 000 to one tax-free savings account for the period, you’ll only be able to invest a maximum of R16 000 in any other accounts you may have. A TFSA is a great savings vehicle but there are three very important things to note:
- 1. Unlike the RA, the annual limit cannot be carried over to a new tax year. Any unused amount will be forfeited for that year. For example, if you’ve invested R30 000 for the tax year, you can’t carry the R6 000 over to the next year.
- 2. Any excess amount that you invest above the contribution limit will be taxed heavily at a rate of 40% so always keep track of how much you are contributing every tax year.
- 3. You can withdraw money from your TFSA whenever you want but any amount that you contribute to replace the money you have withdrawn will be seen as a new contribution and will count towards your annual and lifetime contribution limit.
How does it save on taxes?
What makes a TFSA unique from other discretionary savings and investment accounts like unit trusts, is that all returns including the capital gains, income, and dividends earned within your TFSA are tax-free! This means that you will not be liable to pay tax on the growth of your investment or when you decide to withdraw money from your account.
What other tax-saving options are available to South Africans?
You may already be contributing to an RA or TFSA, or have reached the maximum allowable contributions for the tax year and are wondering if there are any other ways for you to save on your tax bill. The answer is, yes there are!
1: Join a medical aid scheme
What is a medical aid scheme?
A medical aid scheme is a non-profit organisation that provides financial cover for the medical expenses of its members. In a medical aid scheme, members pay a monthly amount called a contribution that is safeguarded and administered by the scheme. This money is then used to pay out medical claims and covers members’ healthcare costs such as hospitalisation, treatments, and medicine.
How does it save on taxes?
As part of the medical scheme’s fees tax credit, SARS will give you a fixed monthly tax credit of R364 for you as the primary medical aid scheme member,R364 for your first dependent, and then R246 for each subsequent dependent. This is a flat rate per month and does not consider your taxable income but is rather a direct deduction of your tax liability.
Let’s look at a simple example below:
Say you are part of a four-person household with a spouse and two children, your tax credit will be calculated as follows: Main member:R364; first dependent (spouse): R364; child 1: R246, and; child 2: R246. This means that the total tax credit per month will be equal to R1220, or R14 640.
What does this mean for you?
It means that your tax liability for the tax year will be decreased by R14 640. If your tax liability is less than your medical aid tax credit, your tax liability will be reduced to zero and you will not owe SARS any money. You will not be refunded the difference.
2. Donate to a registered public benefit organisation
What is a public benefit organisation (PBO)?
A PBO is a non-profit organisation that is registered with SARS that is exempt from paying taxes on the donations it receives. A Section 18A-approved PBO has received extra exemption allowing donors to also benefit from tax-deductibility.
How does it save on taxes? Donations made to a registered Section 18A-approved PBO are tax deductible on up to 10% of your taxable income.
Example:
If your taxable income is R200 000, the deduction you can claim from SARS for the donation made is limited to R20 000. If you donate less than the limit, then the actual amount of your donation will be used to reduce your taxable income. If you exceed this limit, the excess amount will be carried over to the next tax year. It’s important to note that not all charities have PBO status and you should make sure that you are donating to a PBO that is registered with SARS to capitalize on this Section 18A exemption. You should also keep a record of your donation (check the requirements for PBO receipts issued here – section 11). This is a great way for you to contribute towards a worthy cause while also saving on the amount of taxes you pay.
You can search here for SARS-approved Section 18A PBOs.
And there you have it – plenty of time left to capitalise on some of the options listed above. Speak to your financial adviser or service provider today to confirm the cut-off dates for accepting instructions.