Tax season is here and there is exactly one week left to submit your returns! This filing season, themed ‘No Sweat’ (yeah right, SARS), is due to start on July 1 and end on October 31. If you've neglected your tax return, it really would be a good idea to make some time to get it done as soon as possible.
To further help you in the mad world of tax, I've put together some of the most useful tips I've come across over the years. If you know of a cool tax tip, please leave a comment below!
1. Know how to calculate income tax
Even if you don't have any other incomes or if the company you work for does all your tax, I still think it's important to understand how tax brackets work. There is a common misconception that if you earn more, it could result in you paying more tax. While it is true that you will pay more tax, the tax is calculated per bracket. So even if the brackets were, for example:
- 0 - 180 000 - 10%
- 180 000 - 350 000 - 15%
If you earn 200 000, it means you will pay 10% tax on the first 180 000, and then only 15% on the amount over that. You will not get charged a flat 15% for the full amount. In other words, it is always better to earn more.
0 – 195 850 18% of taxable income
195 851 – 305 850 35 253 + 26% of taxable income above 195 850
305 851 – 423 300 63 853 + 31% of taxable income above 305 850
423 301 – 555 600 100 263 + 36% of taxable income above 423 300
555 601 – 708 310 147 891 + 39% of taxable income above 555 600
708 311 – 1 500 000 207 448 + 41% of taxable income above 708 310
1 500 001 and above 532 041 + 45% of taxable income above 1 500 000
If you earn 500 000.00, your tax bracket would be:
423 301 – 555 600; 100 263 + 36% of taxable income above 423 300
In other words:
500 000 - 423 500 = 76500
36% of 76500 = 27 540 + 100 263 = 127 803
If you earned 500 000, 127803 would have to go to SARS and 372 197 can go to your bank account.
Any income earned is taxable. So be sure to keep track of what you earn and make sure you pay SARS the correct amount each month. Make sure you understand how to calculate your income tax and use a tax calculator to check your calculations.
2. Be careful of "max bracket" calculations
In an effort to make the numbers easy to work with, I'm using an example where your salary is R500 000 per year. The same math can be applied to higher or lower income earners.
Imagine you own a business that earned R 500 000 in this financial year. You then paid yourself that full R500 000 Rand as a salary. You then used this money, all of it, because you have other savings and figured you could use the savings to pay the income tax when the time comes.
Not being an accountant or anything, you do a quick sum in the back of your mind. You know the highest tax bracket is about 40%. And 40% of R500 000 is R200 000.00. That's okay, you happen to have exactly R200 000.00 in your savings with which you can pay your tax! Fantastic, so you should have no problems paying tax, right?
In the above example, the problem is this:
- A tax bracket of 40% means that the ratio of your income is divided into two portions of different sizes:
- 40% that goes towards tax, and
- 60% that you get to keep as disposable income
- Therefore, if you had spent R300 000, then you'd have to pay R200 000 as tax (in this scenario)
- The problem is you didn't spend R300 000. You spent R 500 000.
- If the R 500 000 you took is the 60% disposable income, then it means the other 40% is going to be:
500 000 / 60 x 40 = R333 333
In other words, you thought you would only have to pay R200 000.00 tax, but you would really need to pay is R333 333. Meaning the actual difference is a whopping R133 333.00 that you would need to pay over to SARS.
That is why it's so important to understand how tax is calculated and to always remain on top of how much you have taken in a year versus how much tax you have paid. Losing track of this can result in very nasty surprises at the end of the year.
3. Build a relationship with an accountant
It's extremely important to have a knowledgeable accountant who manages your books for you. However, it's not an excuse to let your hair down and leave everything in the accountant's hands. Ultimately, you are the one spending your income and your accountant's job is only to convey your income and expenses to SARS. If you don't know how much to spend versus how much to pay as tax, you are going to run into trouble no matter how good your accountant is. Realise this and know that you will have to walk a path with an accountant and also learn a thing or two if you wish to make successful tax returns at the end of each year.
A good accountant will:
- Help you deduct the right expenses so you pay less tax
- Understand your circumstances and how to get the maximum benefit from it
And I hate to say this, but, a good account will:
- Probably not be cheap
There are a lot of factors involved when charging you a fee, such as how many transactions you do per month, how many income streams you have etc. Best is to get a quote from a few people and do a cost/benefit analysis.
Once you find the right accountant, work closely with that accountant so he understands your situation and how to best do your accounting for you.
4. Make use of a tax-free investment vehicle
If you are investing for the long term, or if you are already paying income or capital gains tax on your existing investments, you can invest in tax free unit trusts and benefit from tax savings on your investment return. The maximum amount you can put into your account per tax year is currently R 33 000, with a lifetime maximum of R 500 000.
But just how much are you saving? It depends on your income tax bracket. For demonstration purposes, I'm going to use a flat income tax rate of 40%, flat interest rate of 10% per annum and look at how much you would save on tax by investing the maximum each year, on the 1st of that year. With a maximum lifetime of R500 000, that means it will take you 500 000 / 33 000 = 15.15 years to fully utilize this benefit if you invest the maximum amount of R33 000 per year.
Year 1: R33 000 invested, R3300 earned
If you had earned R 500 000.00 that year, this would mean that you now earned R503 000.00 with the additional R3300 earned from the investment.
40% of R 503 300.00
= 201 320
So you would have had to pay R201 320 as tax, but now you only pay R200 000. So you save R1320.00. Which boils down to R110 a month. It's not millions, but certainly better than having to pay the tax if you had it in a normal Balanced Fund or Money Market Fund where tax would indeed be applicable.
But how does this add up over the years? Here's a projection based on the same previous assumptions (R500 000 total income per year, 40% fixed flat rate income, 10% interest per year):
Year 1 - 1320
Year 2 - 2640
Year 3 - 3960
Year 4 - 5280
Year 5 - 6600
Year 6 - 7920
Year 7 - 9240
Year 8 - 10560
Year 9 - 11880
Year 10 - 13200
Year 11 - 14520
Year 12 - 15840
Year 13 - 17160
Year 14 - 18480
Year 15 - 19800
In your 16th year, you will be saving R20 000.00 per year or roughly R1750 per month. If you add up all the years, it means you will have saved R179 520.00 over 15 years. And you will continue to save R20 000.00 per year as long as you don't withdraw the money in your tax-free investment.
Not all Unit Trusts can be used as a Tax-Free Investment Vehicles. For example, at Allan Gray you can only use the Money Market Fund and the Allan Gray Balanced Fund. So if you are already in those funds or plan to invest in them, you should seriously consider rather using the Tax-Free option.
5. Do a short course in tax
It really has become a lot easier nowadays. You don't need to go to a fancy lecture hall or even leave your house. Udemy, for example, offers a bunch of fantastic courses at bargain prices. But the tricky part is finding a useful course that has relevant information to where you live. And unfortunately, I don't think Udemy will cover South Africa. You might have better luck finding something on this page.
I'll do some digging to see if there are courses that offer a detailed introduction at an affordable price. If you can recommend something, please leave a comment below!
6. Understand Capital Gains Tax (CGT)
Capital Gains Tax is triggered when you sell a property. However, if the property is your primary residence, you only have to pay Capital Gains Tax on the amount you earn over R2 000 000.00. This is a massive tax benefit for anyone selling a house. Be sure to ask your accountant about this if you are selling your property. It's certainly something you want to take into account when deciding whether or not to buy that next house.
7. Deduct Everything you are legally allowed to deduct
This is probably the easiest way to save on tax.
There are several different deductions that you are allowed to make, but again, it depends on your circumstances. For example, you might be able to claim up to 15% of your rent as a business expense if you work from home. But to expect you to know the relevant deductions is also not realistic. Especially as legislation changes from year to year. For example, Trusts have lost a lot of its appeal due to legal changes. Also, dividend and company tax has gone up, which means it might make more sense to avoid taking a dividend where possible.
These are just some rules that may or may not be applicable to you. An accountant will know many others and will be able to advise you based on your specific situation. Make sure you remained informed and aware of the deductions applicable to you.
The best way to stay on top o f these changes and to make sure you deduct everything you are allowed to each year, is to insure you have a good accountant that understands what you do and guides you so you utilize these as much as possible.
8. Know how to use your Retirement Annuity to your benefit
A Retirement Annuity (RA) is highly effective way to save for when you are old.
The deduction is limited to 27.5% of the greater of remuneration for PAYE purposes or taxable income (both excluding retirement fund lump sums and severance benefits). The deduction is further limited to the lower of R350 000 or 27.5% of taxable income before the inclusion of a taxable capital gain.
So let's say you earned 400 000 Rands in a financial year. In February, you strike a massive deal and earn 100 000.00 Rands more. You now have a choice.
- The tax on 400 000.00 is:
63 853 + 31% of taxable income above 305 850
which works out to: 63 853 + 29 186.50 = 93 039.50
- The tax on 500 000.00 is:
100 263 + 36% of taxable income above 423 300
which works out to: 100 263 + 27 612 = 127 875
So, if you had to take the 100 000 as a salary, you would pay 127 875 - 93 039.50 = 34 835.50 extra tax. So of the 100 000, only 65 164.50 would reach your pocket.
Alternatively, you can also put the 100 000 in your retirement annuity. 100 000 of 500 000 is 20%, which is less than the 27.5% limit. So if you had to do this, just make sure any other contributions you did throughout the year would not push you over the limit. On 500 000, the maximum you may contribute is 137 500 (without paying additional tax). So if you contribute 100 000 in the last month, it means you must not have allocated more than 37 500 prior to that. This works out to R3125 per month.
So your choices are:
- Pocket 65 000 and pay 35 000 over to SARS as Tax, or
- Place the full 100 000 into your pension
I can understand that this is not as enticing for people under 50, as you can only access your RA cash when you are 65. In that case, perhaps consider putting at least a portion of extra earnings into your RA and the rest in something more liquid. But certainly be aware of the option, as it can be very handy when doing tax calculations and trying to decide what's best to do with extra cash.
9. Provisional Tax vs Pay As You Earn (PAYE)
As a South African tax payer, you have two options when it comes to paying tax, namely:
- With PAYE, you or your company pays the amount owed over to SARS at the end of each month.
- With Provisional Tax, the tax payer makes at least two payments based on calculations made for that year.
There are many ways you can use these to benefit you, but it really depends on your circumstances. I personally prefer to pay my tax each and every month and know that I am 100% up to date. Others prefer to make an estimate, and then should they earn more money than estimated, they can store the tax in an interest-accruing account or maybe even their bond. Your accountant can certainly advise you on the best option for you, but it's important that you understand the implications of both.