As tax practitioners specializing with individual tax returns, we work extensively with many individuals and thought it appropriate to assist individuals with maximizing their returns using legal ways. We consider ourselves the best tax practitioners in Johannesburg. We tried to write as informative and extensive as possible as half a tax tip has no value and we always try and create value.
Tip 1 – Employment gapping
This cannot be done easily but when it is done, it generally yields good results. This is an excellent way to get a tax refund. However, most of the time it means less income during a tax year. Let us say a person wants to retire, take a voluntary retrenchment offer, work aboard, start their own business venture or simply resign from their employment – do it at the right time. If timed correctly, there could be a refund due to you. We are not encouraging this but if your situation calls for this, understanding a gap in employment could be used to your advantage.
Consider that an employer would make use of the average tax system which means that each month a salary, bonus, allowance, etc. is paid, the system would annualize such amount to arrive at the amount of taxes that needs to be paid monthly. When an employee ends their employment, income ends and also the withholding of their taxes. Since the payroll system estimated the income to be higher, PAYE would have been withheld accordingly and when the return is submitted, income would be less (since it is not for a full year) than the above estimate (of taxes withheld and paid over to SARS) leading to a tax refund. Planning which month of the year to end one’s employment / retire, etc could add cash to your pocket.
Quick example: if a person earns R100 000 per month and works for a full year, the employer would deduct R32 902 per month on taxes using tax tables 2020 as long as there are no further allowance / bonuses. By the end of the tax year the individual would have earned R1 200 000 and paid the correct amount of taxes amounting to R394 820. (So, no refund here as there is no gap). If the person ended their employment at the end of August 2018, their earnings would be R600 000 with R197 410 taxes paid by the employer. Upon assessment, taxes will be imposed on the R600 000 which amounts to R150 986 and yielding a refund of R46 423. If the person resigned in month 3, they would have earned R300 000 and the employer would have withheld R98 705 and the tax bill would amount to R48 112 leading to a refund of R50 593. Ending employment at the optimum time is therefore crucial where this could be planned.
Tip 2 – Retirement funds
Contribute to a retirement annuity, pension fund or a provident fund and NOT withdrawing early from these retirement saving vehicles is key. An individual may have deducted against their income up to 27.5% of their retirement contributions to these funds (with an annual limit of R350 000). If done through the employer, the benefit is collected monthly and not when the return is filed. (Usually the case with a pension or provident fund). Where a private retirement annuity is held and the employer was not informed of these contributions, a tax refund could be expected proving there is other reason to pay in on the return.
To illustrate, let us use an example of a person with taxable income before deducting the retirement annuity contributions against their income of R2 000 000 per year, R800 000 per year and R520 000 a year. Assume the retirement annuity to be R100 000 in each case.
|Example 1||Example 2||Example 3|
Some individuals inform their employer of a private retirement annuity and request to pay less taxes monthly on grounds to making these contributions. We recommend that this NOT be done simply as we have seen too many errors and situations where an amount has to be paid in when a return is filed due to a miscalculation or due to the policy being ended and the employer continuing to grant the benefit. Avoid this issue completely by claiming the benefit when the return is filed. SARS does not have any issue refunding taxes providing all returns are up to date and the person is in good standing with SARS.
Avoid early withdrawal from these funds as there are two tables taxing a withdrawal from a retirement annuity fund, pension fund or provident fund. Early withdrawal has a higher tax rate while drawing the amount upon retirement has a much more favorable tax rate with the first R500 000 being tax free. Remember that these are lifetime tables and not based a single withdrawal. Any amounts withdrawn before is added together so past withdrawals are to be avoided.
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Tip 3 – Travel allowances
Where business travelling is done, make sure that the travel allowance is structured properly and that a logbook is kept in the correct format as requested (and often demanded) by SARS. We often see clients with expensive cars, high business mileage and a low travel allowance. A travel claim is limited to the allowance on the IRP5. (Refer to code 3701, 3702, 3722) If travelling is done in such a way that an amount higher could be deducted than the amount on the above codes, the travel allowance claim is limited to the amounts under the above codes and the excess portion is lost. This could be a massive loss to a taxpayer depending on the extent the allowance was structured incorrectly. Not having a logbook would also land a person in hot water with SARS and the possibility of understatement penalties being imposed if a claim is presented without the correct documents. Ensure that the logbook meets all criteria required by SARS before submitting a return with a travel allowance.
See our article for more detail – https://www.fmjfinancial.co.za/travel-allowance/
Tip 4- Maintaining a home office
If you are required to work form home, claim a home office expense. Make sure that the office area is used regularly and exclusively for the purposes of trade and that the home office is where the duties are mainly rendered from and for or on behalf of an employer. Also make sure that all the required documents are available, as SARS, in our many years of experience, always audits a return with a home office claim. An employment contract, a letter from one’s employer along with all expense documents for the building must be maintained and submitted to SARS for approval. (This does not include phone, internet and other costs not relating to the building) Be ready to dispute any additional assessment by SARS by referring to legislation as these are often disallowed during an audit and have to be fought for. (For help with this, CONTACT US)
Tip 5- Medical aids with or without a disability
Medical – There isn’t much tax to be saved here unless a person has a disability or has attained the age of 65 during a period of assessment (LINK to article) in their household. Over the past years, the tax benefits given have been limited unless a person had many medical expenses. To better understand how the tax benefits for a medical aid work (CLICK HERE)
It is not advisable to get a medical aid for tax benefits. Rather claim tax benefits if you have a medical aid.
The reason we are mentioning a disability is as SARS will grant additional medical tax credits to a taxpayer when there is a disability within the family as defined or a taxpayer has attained the age of 65. This means that a person would get a tax benefit of 33.3% of medical contributions, expenses not paid by the medical aid and other qualifying costs. (After deducting 3 times medical credits)
If you have a disability within the household, we would like to hear from you. Contact us
Tip 6 – Tax free investments
For those that are being taxed on their interest income consider a contribution to a tax-free investment. Currently, a person may contribute up to R33 000 per annum and any income earned within this product will be free of taxes. This is especially suitable for a person that is already being taxed on their interest income or that is close to being taxed on their interest income due to receiving an amount of R23 800 for a person under the age of 65 or R34 500 for a person that has attained the age of 65 on any day during a period of assessment. (Even if one turns 65 years of age on or before 28 February during any tax year, the additional benefits may be claimed in the tax period when this age is attained)
The interest exemption has remained at the same amounts as mentioned above and will seemingly not increase anytime soon. This is as government wants people to invest in tax free funds. Each individual taxpayer has a lifetime limit of R500 000.
Another good strategy would be contributing an amount of R33 000 for a minor or major child if the intention is assisting the child later. If done early for a minor child, they could keep it many years during their working life earning exempt income and without the parent being taxed on this income. It could even serve as a college fund. Remember that there is a lifetime limit of R500 000.
Also remember that there are no carry overs so if in the preceding year no amounts were contributed, this amount could not be caught up in the subsequent year or a penalty of 40%, may be imposed on the contributions in excess of R33 000. Having various investments for the same individual is also acceptable providing that the investment amount does not exceed the amount as above.
Also remember that the exemption applies to South Africa so if assets are purchased in a foreign country, the foreign tax authorities may impose a tax on the income sourced within their country. The amount would then not be subjected in SA taxes again if in a tax-free investment vehicle. (Residents are taxed on their worldwide income with a credit for foreign tax credits (Section 6quat))
Withdrawals may be made from these tax-free investments without tax consequence and any replacement would be considered as part of a new contribution with the above R500 000 lifetime limit.
Tip 7 – Restructuring investment income
This one can be tricky depending on a taxpayer’s goals, age and risk profile. A good balance in receiving interest income, dividend income and income from capital gains could have higher amount exempted. A good product from a financial institution that is well diverse could achieve these goals. One will benefit from the interest exemption as well as a capital gains exemption which is currently sitting at 40%. Furthermore, capital gains are only included as income at a rate of 40% after the R40 000 exemption. Dividend taxes are withheld at a rate of 20% and is received by the taxpayer net of dividend withholding tax providing these are local dividends (and excluding REIT dividends). A word of caution, these investments are riskier so one would have to evaluate if a person is willing to take the risk supposed to losing investment capital due to inflation and taxes. Let us look at an example to illustrate the difference between a diversified and non-diversified investment where an individual is on the 41% tax margin and in both cases earned R100 000 investment income:
|Interest exemption (If under 65)||-23800||-23800|
|Less tax preparation fees paid||-2000||-2000|
|Dividend income exemption||-15000|
|Capital gains income||45000|
|Capital gains exemption||-40000|
|Capital gains excluded (R5000 *60%)||-3000|
|Included as income||74200||26200|
|Tax on amount||30422||10742|
Remember to deduct fees paid to your tax practitioner against this additional income.
Once a person earns all the above exclusion and further income would be taxed at a rate greater than 30%, consider moving any new investments to an endowment and no longer in a unit trust. The reason for this is that the fund is being taxed and not the individual and once a person exceeds a tax rate of about 30%, an endowment may be a cheaper investment option.
Tip 8 – Claiming against independent contractor or commission income
If a person is in receipt of commission income that is more than 50% of the total income (multiply the amount under code 3606 with 2 and ensure that this amount is more than the amount under SARS code 3699) or if a person has code 3616 on their IRP5, the person may be seen as self-employed and be entitled to claim valid business expenses against their income.
In practice, the above should only be done by professionals that are familiar with the laws. It is easy to incur understatement penalties for submitting the return incorrectly or not being able to defend what was submitted. A deep understanding of Section 11 of the income tax is required with reference to matters such as Section 11(e), (d), (o) etc. (Wear and tear, repairs, scrapping allowance, recoupment, as well as section 23(b) and (m) (Personal and prohibited expenses).
CONTACT us if you think you may qualify here.
Tip 8 – Joint ventures
SARS permits 100% of an investment in a recognized and approved joint venture. In practice, this is only worthwhile for those on the top tax margin (45%) after an investment into such venture. A person should also be investment savvy since some investments are good one and others are bad ones. In our view, be careful about those that are self-liquidating assets.
Tip 8 – Donations
Up to 10% of donations made to a SARS approved public benefit organizations are deductible against a taxpayer’s income providing they hold a Section 18(A) certificate.
Tip 9 – Foreign tax exemptions and other deductions
If a taxpayer was rendering services for and on behalf of an employer and these services were rendered in a foreign country, the foreign income (not all the income) can be exempted under Section 10 of the income tax act. The taxpayer must make sure that the employer has used the correct codes and that they are familiar with this piece of legislation as SARS collects money and having these exemptions granted can become complex. This is true to the extent that some companies, such as our company (CLICK HERE) specializes in having these exemptions granted. Large refunds generally result from successfully navigating these cases where a South African employer has withheld and paid taxes over to SARS. (Which could be refunded to a taxpayer upon SARS concession)
Tip 10 – Properly managing a rental property
It sounds easy, a profit is taxed while a loss leads to a refund. Unfortunately, not! Where a rental property makes a profit, an individual has to assess the profit of the trade between March – August and pay an estimated amount of provisional taxes to SARS. This is repeated during February and any over-payment is refunded to the taxpayer while any underpayment could be subject to a penalty of up to 20% of the amount underpaid as well as interest.
A loss against a rental property is often challenged by SARS to firstly, verify that such transaction is indeed a trade (not presented as a trade but in reality, maintenance of a relative or friend) and that the trade is profitable or is likely to be profitable in a reasonable period of time. The reason, if there is no expectation of making a profit, then there is no trade and a loss may be denied on grounds that no trade exists.
Some people purchase a property, bond it and place a relative in that property charging a small amount of rental and then trying to claim a loss when filing their income tax return. The loss would of course be large and probably under audit as rental properties has SARS full attention. A questionnaire may follow asking many questions which a taxpayer has to answer. Bottom line is that some rental properties do not conform to the definition of a trade which has an intent of profit making. An understatement penalty may be imposed by SARS in addition to rejecting all expenses.
Where the transaction is a genuine trade, SARS may still question the loss and even disallow some expenses. One such example is where a person claims a repair which is an improvement, and which does not qualify as a deduction. Other individuals will try and claim the full bond payments made to the bank which is inclusive of interest (a revenue-based expense) and capital repayments (a capital in nature expense which is not allowed as a deduction)
In other cases, some taxpayers withdraw funds from their access bond and use the funds for a personal reason causing a higher interest expense which SARS rightfully may deny during an audit. (One may only deduct the cost incurred in the production of income and the burden of poof of an amount qualifying as a deduction is on the taxpayer. If the taxpayer could show workings of the portion of interest that remains a business expense and that of a private expense, the business portion may be deducted.) It does not matter if funds were injected into an access bond and then taken out again. Such withdrawal must be employed against the property to qualify under the criteria as an expense incurred in the production of income.
Lastly, if a taxpayer is on the top tax margin (45%) before taking into account the trade, SARS may impose Section 20A and ring-fence the loss against the other income. This means that the loss is not allowed as a deduction during that year of assessment but may be used to offset future profits. Again, this can become complex and one must make sure that losses are carried forward to the next assessment each year. (And that the correct amount is carried forward)
If a taxpayer could overcome all these hurdles, the loss against the rental property may be deducted against their income.
Fees paid to a tax practitioner may also be deducted against this income. Any bad debts or provision for bad debts may also be deducted against this trade income providing the amounts were included as income before and could be proven.
Rental properties can become complex or could be straightforward but should always be declared when an income tax return is filed to SARS.
Lastly, when selling a rental property, remember to build a file for the capital gain that must be declared to SARS with the capital gains trigger point being the date of transfer.