Get a tax booster for your returns

The tax year-end is fast approaching and your window of opportunity to ensure less of your hard-earned money ends up with the taxman is closing. 

In order for you to benefit from the various tax breaks afforded by the government, this is an important time to work through a tax checklist. 

Making tax efficient investments is key to a healthy financial plan, yet many people fail to take this into account when looking at how they can maximise their potential returns, Allan Gray’s tax head, Carla Rossouw, says. 

She suggests as a first step you review your retirement fund contributions, as well as contributions to a tax-free savings account. 

Using a combination of the two products can reduce your income tax and boost your savings and provide you with future tax-free withdrawals. 

The government gives you a tax deduction on the money you invest in a retirement fund up to an annual amount of 27.5% of the greater of your taxable income or remuneration, capped at R350,000 annually. 

Most people don’t contribute this much in any tax year and can make greater use of retirement fund contributions and the tax breaks on offer. 

But you may want to put some money in a tax-free savings account – it won’t give you a tax deduction now but your savings can grow tax free and you won’t have the same restrictions on access to your money or the investment limits that apply to retirement savings. 

In both tax-free savings accounts and retirement funds, there is no tax on the interest, capital gains or dividends you earn while you are invested. Unlike a retirement fund, there is no tax deduction for contributions to a tax-free savings account but you can later draw the money free of tax.

The tax deduction for contributions to a retirement fund can boost your savings, but they are not tax free at retirement. You can access a limited amount tax-free at retirement (R500,000) and lower tax rates for over 65s and 75s.

You can access all the asset classes such as shares, bonds, listed property and cash both locally and offshore through both retirement funds and tax-free savings accounts, but retirement funds are limited by regulation 28 of the Pension Funds Act to investing a maximum of 75% in equities and 30% offshore. 

Rossouw says you can, however, use a tax-free savings account to invest in a fund that invests across the asset classes without any restrictions on how much is invested in equities or offshore markets. 

In your employer-sponsored retirement fund, you can only access the money when you leave the employer or retire. 

In a retirement annuity that you can use if you are self-employed or want to boost your company retirement savings, you can only access your money when you retire after age 55, Anelisa Mti, advisory partner at Citadel, says. And you can only take one-third of the amount as a cash lump sum at retirement. The rest must be used to provide a pension in retirement through an investment-linked living or guaranteed life-annuity, Mti explains. 

A tax-free saving account has fewer restrictions as you can access the money at any time. However,  the SA Revenue Service allows you to contribute a maximum of R33,000 a year and R500,000 in your lifetime to  invest in tax-free savings or investment accounts.  

Once you withdraw, you cannot replace those contributions. For higher earners, likely to reach those limits, the tax free savings account is therefore most useful for savings you will not access for a long time. This enables your money to benefit the most from compound interest all of which is tax free. 

Mti says tax-free savings accounts are often favoured by younger savers because there is no “lock-in” period. 

But Jaco Prinsloo, certified financial planner at Alexander Forbes Financial Planning Consultants, says while tax-free savings accounts are not designed to be your sole source of retirement savings, they do give you an opportunity to boost your savings.

He also warns that if you exceed the annual or lifetime contribution limits, there is a significant tax penalty.

You can also pay less to the taxman if you are willing to donate that money to a public benefit organisation, a non-profit organisation, which Sars has approved to receive donations tax free. 

The organisation has to be involved in charitable work in among others healthcare, education and poverty alleviation. 

But remember your contributions to registered PBOs are tax deductible up to a limit of 10% of your taxable income. Any donation exceeding this limit will be carried forward and can be claimed as a deduction in the following tax year. 

To claim the tax deduction, you must obtain a tax certificate from the PBO. 

Save tax from the next tax year

There are only a limited number of ways to save tax for the tax year ending at the end of this month. 

But you could consider implementing these steps for the new year starting on March 1:

* A tax rebate for belonging to a medical scheme: If you are paying for visits to a doctor, hospital or pharmacy and are not a member of a medical scheme, you could join a scheme and enjoy a tax rebate or discount on the tax you pay. 

If you contribute to a medical scheme, you will receive tax credits for the contributions you pay for you and your dependants, Marc Sevistz, the co-founder of online tax consultants TaxTim, says.

For the current tax year, the tax credit for medical scheme contributions is R310 a month for the taxpayer who pays the medical scheme contributions for him or herself only, R620 a month for the taxpayer and one dependant, and R209 a month for each additional dependant. 

* Recording business mileage if you receive a travel allowance: A travel allowance is a taxable fringe benefit, which means it is included in your taxable income and you are taxed on it. If you keep a logbook to record your business mileage, you can claim a deduction against the allowance, which could reduce the tax you owe to Sars. 

* Recording business-related expenses: If you are a commission earner or self-employed, you may be able to deduct the expenses you incur in generating that commission or business income from your income and pay less tax. 

Your commission income is recorded on your IRP5. If that commission makes up more than 50% of your total remuneration, SARS will allow you to deduct expenses you incur in generating that commission, such as stationery and employees’ costs, against that income. 

“Sars will also allow you to deduct all your business-related travel against your commission income but only if you keep a logbook to record all of your business travel,” Sevitz says.

If you are self-employed, you can deduct business expenses such as telephone, Wifi and stationery against your business income. These are all expenses you incur in order to earn your income.

“You need to keep a record of these expenses together with the related invoices so that you can take advantage of this deduction,” Sevitz says.