Many South Africans fail to understand the benefits that comprehensive tax planning holds when saving and investing money. However, with careful planning, you could legally save on the tax you are liable to pay on some investments and income. These savings can be so significant that they could result in you having more money to add to your savings every year or it could even fund your year-end holiday.
If you want to make use of the savings available to you, it is best to consider partnering with a respected financial advisor to help you take advantage of all relevant tax benefits, although with some effort you could also do it yourself.
Here are a few key tax benefits that you could consider to reduce your overall liability.
- Save money by giving some away. The benefits of donations tax
- Take advantage of the tax benefits linked to your retirement annuity (RA)
The first R100 000 donation per taxpayer and donations between spouses are exempt from tax, as is 10% of your taxable income that is donated to recognised public benefit organisations (for which you also receive an income tax deduction).
Technically, giving money away is not saving but the benefits of donations tax exemptions are useful for estate planning. High net worth individuals could consider donating R100 000 per annum to their children, grandchildren or possibly a trust, thereby reducing the value of their estate and the future estate duty liability.
There are three tax benefits associated with RAs:
- Contributions of up to 27.5% of your gross remuneration or taxable income are tax deductible, subject to an annual limit of R350,000. In other words, if you earn R700,000 per annum, you can reduce your taxable income by R192,500 if you contribute the maximum 27.5% to an RA.
- Investment returns from an RA are tax-free – You are not liable to pay income tax or capital gains tax on any investment returns achieved in your retirement annuity.
- Favourable tax benefits – A portion of the lump sum benefits you receive when you retire are tax-free.
- This works on a sliding scale:
- The first R500 000 of this upfront amount are tax-free
- R500 000 and R700 000 is subject to 18% in tax
- Amounts between R700 000 and R1 050 000, you are required to pay R36 000 plus 27% in tax
- Amounts exceeding R 1050 000, you are required to pay R130 500 plus 36% in tax
- Read more about what investments are most affected by tax –https://www.ecsponentlimited.com/2016/04/12/what-investments-are-most-affected-by-tax/
If you are successfully receiving money back from SARS, you may want to consider a tax-free savings account. This is a good way to experience investment returns without having any of the gains taxed.
However, you need to weigh up the returns and your risk profile as tax efficient investments don’t necessarily provide the highest returns, even after the tax benefit. An alternative to consider could be Ecsponent’s preference share programmes, which offer a fixed return and peace of mind in this volatile market.
You can read more about tax-free savings accounts vs. retirement annuities here-
Always be mindful of the implications of Capital Gains Tax (CGT), which triggers when certain events happen such as a sale, donation, exchange or loss of property, emigration or death. The first R40,000 of capital gains is exempt from income tax and specific events are excluded altogether. These include:
- A R2 million gain on the sale of a primary residence
- Most personal use assets, including cars, furniture and household appliances
- 50% for a non-trade purpose
- Proceeds from an endowment or life insurance policy
- Individuals and special trusts get granted an annual exclusion of R40 000 capital gain or
- capital loss
- Tax deductions on medical expenses
Married couples can structure their investments so both can make use of the tax-free portion. A taxpayer can also structure the sale of his shares over a number of years to enjoy the annual exemption each year.
If you are compensated for any work related travel, remember to claim your travel expenses by submitting the travel details to your employer. Additionally, remember that if you receive a travel allowance, SARS requires that you submit an updated logbook when you file your tax return, so don’t forget to log each business trip. You will need to show your starting kilometres, end kilometres, date of the trip and its purpose.
You can download a logbook for daily use here https://www.sars.gov.za/AllDocs/Documents/Logbook/2016-17%20SARS%20eLogbook.pdf
Some South Africans like to boast about how they outwit SARS. However, SARS has become a much more professional organisation and very efficient in their collections process and many brave tax avoiders have been caught. Our advice is to make use of all the possible tax benefits within but always comply with SARS’ regulations. And remember, it’s your responsibility to keep all source documents, such as contracts, cash receipts and invoices.
Tax efficiency, in relation to your savings and investments, is a precise science. While tax planning can be lucrative, making even the smallest mistake can prove to be costly. This is why employing the services of a tax professional to check and submit your tax returns will help you to get the best results from your tax and savings endeavours.
Read more in the Ecsponent 2016 Tax Guide – https://www.ecsponentlimited.com/wp-content/uploads/2016/03/2016_Ecsponent-Tax-Guide.pdf