How to Take Advantage of Tax Season
It’s that time of the year when, after surviving Januworry, we realize that the end of the tax year is fast approaching and just like all New Year’s resolutions that we make with such vigour, we have yet again left taking advantage of the tax breaks from SARS until the very last minute. To my fellow procrastinators, there is no shame. This is a safe space and you are not alone!
When it comes to finding ways of saving on our taxes, going to the gym more regularly, or making healthier dietary choices, like Professor Piers Steel says, we often procrastinate because we don’t feel confident that we can complete the task at hand.
If you do find yourself sitting with some extra funds after the festive season or from your annual bonus, or maybe received some additional funds as a result of a change in employment, you might not know or understand the details around taking advantage of tax breaks and might feel that only a tax specialist can figure out this conundrum. And so, you tend not to bother at all. You see, procrastination.
Jean-Baptiste Colbert famously once said, “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.” Understanding how you can make your taxes work in your favour may sound complicated, but let’s take a deep breath, accept that there may be some slight hissing involved, and consider the various incentives that our government has put in place to make it easier for you to not only save for your future but to save on your taxes, too.
The below is a simple guide to keeping a few more feathers from the goose in your pocket.
Making your investment products work for you
There are two main investment products that exist that are designed specifically to make it easier for you to maximise your tax savings. These can be considered as the golden eggs of the pile.
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.
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 will 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 that has already paid tax on your total earnings by means of P.A.Y.E. (pay as you earn), you may qualify for a refund. If we use our earlier example of an income of R200 000 contributing 15% to your RA, based on the current income tax rates, you may qualify for a refund of up to R5 400 (your RA contribution multiplied by your tax rate).
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.
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:
- 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.
- 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.
- 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 R347 for you as the primary medical aid scheme member, R347 for your first dependent, and then R234 for each subsequent dependent. This is a flat rate per month and does not take your taxable income into consideration 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: R347; first dependent (spouse): R347; child 1: R234, and; child 2: R234. This means that the total tax credit per month will be equal R1 162, or R13 944 per year.
What does this mean for you?
It means that your tax liability for the tax year will be decreased by R13 944. 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. These organisations are usually involved in charitable work across various industries such as healthcare, education, and conservation, to name a few.
How does it save on taxes?
Donations made to a registered PBO are tax deductible on up to 10% of your taxable income.
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 make sure that you are donating to a PBO that is registered with SARS to capitalize on this exemption and keep a record of your donation. 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 click here for a list of SARS approved PBOs.
Now that you know of the various ways that you can save on your tax bill, don’t let the proverbial procrastination monkey get you before the end of the tax year. There is still time to take advantage of these tax savings. Speak to your financial adviser or service provider to confirm the cut-off dates for accepting instructions.