We’ve all probably had that parent telling us how important it is to save for a rainy day; that if you put money away in a savings account or an emergency fund, you will be able to stop adding to your debt with every financial obstacle you face.
You know the kind of bump in the road we’re talking about – when your car needs expensive repairs, unforeseen medical costs, or a global pandemic such as COVID-19. By cushioning for these kinds of unexpected events, you won’t face financial disaster, not to mention being able to provide you with a greater sense of financial freedom.
The COVID-19 pandemic has hit everyone one way or another with varying financial implications. As everyone still needs to continue paying tax, we want to try to help you minimise the amount of tax you pay and help improve your financial situation.
Tax Recovery and Savings
Proper tax planning should be part of your financial and investment strategy. Get savvy with your tax returns. Here’s how to reduce your taxable income and save more money.
Salary sacrificing is an arrangement between employer and employee where the employer agrees to forgo part of the employee’s salary in exchange for other benefits, such as contributions to benefit funds, medical aid, or travel allowances. This then reduces the amount of tax you must pay. What happens is you forgo part of your pre-tax salary before you receive it, and these benefits can save you thousands a year in tax.
KEEP AN EYE ON YOUR TAXES
Regularly keeping things on track can be a bit of an adjustment for some of us, as not everyone is good at admin. However, it will pay off in the long run, so be prepared to keep good tax records by documenting everything. If you need to make tax deduction claims, keep all your receipts. Luckily, nowadays, you can even find an app, like Expensify or NeatDesk, that will make these procedures a lot easier. Set aside some time each week to load your receipts onto your app so that tax season will be a breeze.
CLAIM ALL DEDUCTIONS
As a freelancer, independent contractor, or a commission earner, do you know all the deductions you are allowed to claim on your tax? Using these is a great way to minimise your taxable income, so make sure to claim all legitimate work-related deductions. All expenses incurred in the production of income can be claimed in terms of s11(a) of the South African Income Tax Act. For example, but not limited to, purchase of IT equipment, industry-specific books, and training, vehicle and travel expenses – including meals and accommodation, and home office expenses.
Due to the COVID-19 pandemic and lockdown, many of us have been forced to work-from-home over the past months, and some employers have even made the decision to keep employees working from home on a more permanent basis in the long-term – with this in mind, it’s important to understand how this will affect your tax deductions.
If a salaried employee has spent more than 50% of aggregate working hours in the 2021 year of assessment (12 months ending 28 February 2021) working from home, they qualify for a tax deduction for expenses incurred to maintain their home office and equipment. This tax deduction is subject to further criteria that your tax consultant will need to confirm with you.
Be sure to let us know if you think you may be eligible for this tax deduction and keep any supporting documentation handy, as SARS often requests it as proof – copies of invoices, statements and relevant calculations are key.
DONATE TO CHARITY
If this is something that tugs at your heart, then donating to your favourite registered charity is one way to reduce your taxable income. You can give up to 10% of your taxable income to a registered public benefit organisation (with a PBO s18A income tax certificate) and claim a tax deduction on this donation. Donations are subtracted from your taxable income, giving you a percentage back.
MEDICAL AID TAX CREDIT
Taxpayers are entitled to a monthly tax rebate in respect of any medical scheme contributions made for the benefit of themselves and their dependents, and an additional rebate is available for out-of-pocket medical expenses incurred by individual taxpayers, with the amount reflecting on your medical tax certificate and any additional amounts over and above this.
Medical & Disability Expenses
All taxpayers are entitled to a monthly ‘tax rebate’ (i.e. credit) in respect of any medical scheme contributions made for the benefit of themselves and their dependents as follows:
Taxpayer = R319
First dependant = R319
Per additional dependant = R215
For additional (e.g. out-of-pocket) medical expenses incurred by individual taxpayers, a tax rebate is available as follows:
- Where the taxpayer is 65 and older or where the taxpayer, taxpayers’ spouse, or child is a person with a disability. 33.3% of the value of the amount by which the aggregate of the medical scheme fees that exceed 3 x the standard medical scheme credits, and all qualifying expenses (other than medical scheme contributions)
- Other taxpayers: 25% of the value of the amount by which the aggregate of the medical scheme fees that exceed 4 x the standard medical scheme credits, and all qualifying medical expenses (other than medical scheme contributions), exceed 7.5% of the taxpayer’s taxable income (excluding any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit including capital gains).
Contributing the maximum amount to your retirement account is a good strategy for tax minimisation. By doing so, you can deduct up to 27.5% of your gross remuneration or taxable income – whichever is higher – in respect of your total contributions. This is subject to an annual limit of R350 000.
(Contributions to pension, provident and retirement annuity funds)
From 1 March 2016 onwards, the tax deduction calculation for the three different funds, pension, provident, and retirement annuity funds will be limited to:
27.5% of the greater of (limit of R350 000 per year):
1. ‘taxable income’ (excluding any lump sum benefits or severance benefits) but before the donation’s deduction.
2. ‘remuneration’ (excluding any lump sum benefits or severance benefits).
The above deduction is, however, limited to taxable income before this deduction and before any taxable capital gain.
Excess contributions not allowed as deductions are carried forward to the following year of assessment. Contributions made by employers on behalf of employees would be a taxable fringe benefit in the hands of the employees but will also be regarded as a contribution made by the employee, therefore deductible in the hands of the employee subject to the above limitations.
TAX-FREE SAVINGS ACCOUNTS
If you didn’t know about this option, it’s a winner. SARS allows taxpayers to save a maximum of R33 000 per year and R500 000 in your lifetime tax-free. Once put into the specially designated account, you won’t have to pay tax on capital gains or interest received on these investments.
Any amount received from a tax-free investment is exempt from normal tax (this includes income on the investment as well as any profits arising on disposal of the investment). The following requirements must be met:
- The investment must be owned by a natural person or the deceased or insolvent estate of a natural person
- The investment must be a financial instrument or policy that is administered by any person or entity designated by the Minister of Finance.
- Contributions to the investment must be made in cash and are limited to R36 000 (R33 000 before 1 March 2020) per year and R500 000 in total (both in aggregate)
In the event where the R36 000 and R500 000 limits are exceeded, 40% of the excess investment is treated as normal tax payable (the income on the excess part of the investment is, however, still tax-free).
If a serious savings plan is not part of your financial repertoire, it is something we encourage you to start as soon as you can. Saving for the unexpected makes sense.
If you require any further guidance on getting to a better tax position in 2021, get in touch with us at Dirmeik Consulting as soon as possible.