Make the most of tax breaks

THE end of the 2020/21 tax year is a week away and, if you act quickly, there are a number of things you can do to reap maximum benefit from the tax breaks available to you, particularly regarding retirement savings.

Who knows what next week’s Budget Speech will bring? Although the government is not expected to reduce the incentives on saving for retirement, you may end up paying more tax overall, particularly if duties on alcohol, cigarettes and petrol are raised and a wealth tax is introduced, which some commentators suspect will happen. So it’s in your and your bank manager’s interests that you make the most of the present tax breaks open to you, even if long-term gains mean a little short-term pain.

We’ll first look at topping up retirement savings and then at other things you can do to avoid paying more tax than necessary.

◆ Top up your retirement annuity (RA). Tax-incentivised retirement savings vehicles comprise occupational pension and provident funds, preservation funds (where you put your savings when you “preserve” them on changing jobs) and RAs. Although it is possible to add to savings to an occupational fund, an RA is the most flexible vehicle for topping up your retirement savings.

You can claim back up to 27.5% of remuneration or taxable income up to R350 000 on annual contributions to retirement funds. “The tax deduction limit applies to your cumulative annual retirement contributions, regardless of whether you have saved in a retirement annuity fund, pension fund or provident fund,” says Natalie Kiewitt, executive of operations at PPS Investments.

She says that if you exceed the 27.5% contribution limit, the excess can roll over to reduce tax liability in future years. “Ultimately, the more you top up your RA contribution for the tax year, the higher the tax benefit.

“The biggest advantage of topping up your RA is that you will have boosted your retirement savings over the long term, and the power of compound interest really takes full effect over time,” Kiewitt says.

She says you can further boost your retirement savings by reinvesting the tax rebate you receive from the South African Revenue Service (Sars) on your retirement fund contributions.

Khwezi Jackson, an investment consultant at 10X, provides an example of how much you save: “If you earn R500 000 a year and contribute R50 000 to your retirement fund, you are taxed on only R450 000. (For the purposes of the example, we will ignore other deductions.)

“At current tax rates, you would qualify for a tax refund of R18 000. This means that your R50 000 contribution to your retirement fund would cost you only R32 000. Contribute R75 000 instead of R50 000 and your tax refund increases to R27 000. Put differently, if your tax rate is 30%, every R1 000 you save costs you only R700.”

Although not everyone has the means to contribute a full 27.5% (or R350 000) of their income to retirement savings, if you have cash to spare, you can put a lump sum into your RA before February 28.

◆ Save in a tax-free savings account. Although you don’t get a tax break on contributions, tax-free investments are not taxed on interest or capital gains and there is no dividends tax on equity and listed-property assets. You can invest up to R36 000 per tax year until you reach the lifetime contribution limit of R500 000.

Kiewitt says: “While a tax-free investment is not designed to be your sole source of retirement savings, it presents an opportunity to boost your nest egg with a lump sum. The tax-free investment is not subject to Regulation 28 (part of the Pension Funds Act) which limits the percentage allocated to certain asset classes, offering you more freedom in choosing investment options. It’s important to note that if you exceed the annual or lifetime limit you will be liable for significant tax penalties.”

◆ Donations. You are allowed to donate R100 000 a year to any natural person (apart from your spouse, where there is no limit). Anything above this is taxed at 20% to R30 million and 25% on anything above R30m. Donations to approved non-profit organisations and charities are, like retirement fund contributions, tax-deductible, but these donations are limited to 10% of your taxable income.

◆ Capital gains tax. For individuals, 40% of any gain triggered in the tax year is included in your taxable income. However, there is an exclusion of the first R40 000. You can use this exclusion to rebalance your investments.

◆ Section 12J investments. You can deduct from your taxable income an entire investment in an approved Section 12J scheme, with a minimum investment amount of R500 000 and minimum term of five years. This provision in the Income Tax Act has a “sunset clause”: the benefit is destined to expire in June this year, and there’s much uncertainty about whether or not it will be extended.

“The habit of saving is itself an education. It fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind.” Thornton T Munger