Time’s running out to make the most of your tax breaks

The best way to cut your tax bill is to top up your retirement fund contributions to 27.5% of your income

THE END of the 2018/19 tax year is fast approaching. It has become customary in Personal Finance each February to explore, with the input of investment and tax experts, the ways in which you can take advantage of tax breaks and reduce the tax you pay for the year. You will have to hurry, however, because certain actions, such as opening new investments or transferring money, may take time, and you only have until February 28.

The most significant tax breaks are on retirement savings, but there are also tax-free investments and allowances on capital gains and donations to consider. For the wealthy, there are also section 12J investments.

RETIREMENT SAVINGS

Gielie de Swardt, the head of retail distribution at Sanlam Investments, says that with the end of the tax year just around the corner, smart investors are doing the calculations on how much they can still put into their retirement savings. You can allocate up to 27.5% of your total annual income to a retirement fund, to a maximum of R350 000, and deduct this from your taxable income (see “What if you contribute more?” on page 11).

While you may not be able to put extra money into your employer’s pension fund at this late stage, you can top up (or take out) a retirement annuity (RA).

“For the self-employed, an RA is the go-to solution for reducing the amount of annual income on which you pay tax and for building financial reserves for later years. In addition, it provides a safety net in case you are liquidated; creditors are not allowed to touch the money in an RA,” De Swardt says.

But what is the difference between contributing more to your employer’s fund and topping up your RA?

De Swardt explains: “With an RA, you will only be rewarded with a tax refund for any RA top-ups during this tax year after you’ve filed your tax return and the SA Revenue Service (Sars) has completed the assessment. Tax filing season opens on July 1, which means the earliest you’ll receive a refund will be towards the end of July.

“If you want to add money to your employer’s fund, you normally need to commit to the increased

contribution for a year, and many companies will only allow you to change the monthly contribution amount on a fixed date every year. You don’t have the flexibility to simply top up on an ad hoc basis.

“However, with higher employer fund contributions the tax relief is immediate, from the day you increase your contribution – you don’t need to wait for a tax refund later in the year. Your payroll administrator will recalculate your taxable income and you’ll see a lower tax amount on your payslip,” he says.

James Williams, the head of marketing at Wonga South Africa, provides an example of contributing to a retirement fund: “If your income is R100 000 and you contribute

R27 500 towards an RA (for example), you will get taxed only on R72 500. At a tax rate of 18%, this represents a tax saving of R4 950. This means that the contribution of R27 500 will effectively cost you only R22 550. And, since all growth in an RA is tax-free, you will benefit from compounded growth on the full

R27 500 contribution.”

TAX-FREE SAVINGS ACCOUNTS

Tax-free savings accounts (TFSAs), offered in different forms by investment houses, banks and life assurance companies, enable you to invest R33 000 a year, with tax-free growth – the growth is not subject to tax on interest, dividends or capital gains. However, your deposits into such accounts are not tax-deductible.

De Swardt says that if you are still under the R33 000 limit across all accounts, there’s a gap for you. If you have savings in standard unit trusts, he says, you may want to consider converting some of that investment (if no penalties apply) to a tax-free version of the unit trust instead. “To do that, you would need to withdraw money from your existing unit trust to reinvest into your TFSA. Remember that the withdrawal would trigger a capital gain with Sars, but the first R40 000 of your taxable gains every tax year is exempt from capital gains tax,” he says.

You need to weigh the pros and cons of using any extra cash you may have to put into an RA or a TFSA (see table on page 10).

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 at 25% above R30m.

You can also donate to approved non-profit organisations and charities. Says Williams: “To encourage [donations], Sars has provided a tax deduction. This is limited to 10% of your taxable income. So, if your income is

R100 000 during the tax year, and you give R10 000 of that to charity, you will only pay tax on R90 000. At a rate of 18%, this represents a saving of R1 800.”

Williams says that on making such a donation, “be sure to collect a section 18a receipt from your beneficiary, which you’ll have to supply to Sars”.

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 (see “Minimise your taxes in February” on page 12).

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 investment term of five years. There are considerable risks attached to these investments (see “Minimise your taxes in February” on page 12).