Tax rates have been rising for several years, as fewer deductions are allowed and as even structures such as trusts and companies now being heavily taxed. Companies, trusts and individuals are paying c. 50% of their declared income in tax to the SA Revenue Service (SARS), with an individual at the maximum income bracket paying 45 cents in tax for every R1 earned. Now, more than ever, tax efficiency can make a material difference to an investor’s overall return. Below, we highlight deductions available and how to maximise these.
The major deduction for most taxpayers today is for contributions to a SA retirement fund (pension funds, provident funds and retirement annuities [RAs]). Each taxpayer is permitted to contribute up to 27.5% of their taxable income up to a maximum of R350,000 p.a. – whichever is the lower. Contributions can be made into any retirement fund/s, but the overall maximum will be applied by SARS to the combined contributions across all your retirement funds. We suggest ensuring you’ve made the appropriate contribution to your retirement fund(s) before the end of the tax year to maximise this deduction.
Contributions to public benefit organisations (PBOs) or charities qualify for a full tax deduction. Obviously, this is not intended to make a profit for the investor as the recipient is a charity. You will need a s18A certificate from your PBO to claim this deduction.
Commission earners qualify for a specific deduction against any expense incurred in the production of income, which includes legitimate client entertainment, functions, industry related membership fees, etc. As a commission earner, it is important to keep track of your business expenses throughout the year to include these in your tax return.
Tax-free savings accounts (TFSAs), while not technically a tax deduction, are well worth further investigation. The major benefit is that there is no tax payable on the investment at all – this includes income tax, capital gains tax (CGT) and dividends tax. Over time, this provides a major boost to investments housed in these vehicles. Savings of 20% on dividends, up to 45% on income tax and up to 18% on CGT make TFSAs very attractive for investors. The downside is the maximum contribution limit is R33,000 p.a. or a maximum lifetime contribution of R500,000. We note that parents can invest in TFSAs on behalf of their children, in addition to their own TFSA. These are ideal for education savings.
Government has identified small and medium enterprises (SMEs) as an area of potential economic growth. However, a challenge for SMEs is a lack of adequate funding and thus section 12J was added to the Income Tax Act to create an incentive for investment into SMEs. Through venture capital companies (VCC), taxpayers can invest in qualifying businesses. The VCC issues the investor with a tax certificate, which is used to claim the investment as a full tax deduction. Taxpayers retain the tax deduction only if the investment is held for a period of 5 years or more. We highlight that the base cost for CGT purposes is set at zero in any section 12J investment, meaning that even if you only get your original capital back you will be liable for CGT.
SA taxpayers with assets above the R3.5mn exemption are subject to estate duty at a current flat rate of 20% for the first R30mn in assets, and 25% on the excess above R30mn in assets. Your beneficiaries will only receive their inheritance after your estate has settled what it owes SARS and without proper planning your estate could be handing SARS up to one-fifth of all your assets. As daunting as this may seem there are tools available for estate-planning purposes. A simple, zero-cost, method of reducing estate duty is to leave assets to your surviving spouse. Assets left to a spouse are currently exempt from estate duty, preserving the R3.5mn tax exemption which can later be used in the spouse’s estate. This means that, on death, your spouse will benefit from a full R7mn estate duty exemption (the R3.5mn exemption x 2).
If you have offshore assets, beware of offshore death taxes such as situs tax (levied for assets held offshore such as property and equities). The thresholds before this tax applies differs by country, but there are tools to address this issue. These include investing within an offshore insurance wrapper, which has the advantages of not attracting situs tax, even while holding the same underlying taxable assets – a 40% boost to your heirs on death! Beneficiary nominations on these structures assist further by avoiding executor fees (another 4% saving).
Finally, all these tax savings can be improved further by using these allowances for your spouse (doubling up on tax savings). These simple steps of using available tax breaks and getting the compounding benefit over several years will mean that your pot of money in later years is hugely enhanced. Tax deductions are very much a part of the tax-planning process. It is your right to reduce your tax by any legal means at your disposal and a simple review of the opportunities appropriate for you could save you a lot of money in the long run.
Anchor can assist you in tax efficiency planning by considering the unique individual needs and circumstances relevant to you, and by providing financial advice based on criteria unique to your situation. Contact us on 011 591 0677 or email us at [email protected].