Given that we’re moving on from tax season (you still have until November to submit your tax return), we thought we’d compile a collection of super-useful & best-of, from all our prior articles on tax.
After-tax returns pay the bills
After-tax returns are generally never sold by financial services companies, as each investor has their own tax profile; each paying tax in accordance with their own specific set of circumstances which makes it nearly impossible to guarantee a tax outcome for each investor. Gross returns (returns before the effect of income tax) are also often used as a metric for the calculation of fees charged on your investment. Which means that for an investment manager, there’s no reason to try to reduce the tax you pay. Which means that you have to do it.
The nature of each different type of investment return (eg: interest, dividends, rental, etc), carries with it a unique tax obligation. You have to consider the after-tax return for all your investments as after-tax returns are what ends up as cash in your account.
Diversify your income, minimize your tax
Part of coming up with a clever retirement plan, is diversifying your income sources. For once, this isn’t about avoiding risk, but increasing your monthly after-tax income. Some sources of income offer obvious tax benefits, like interest income. All natural person taxpayers are able to earn a certain amount of interest per year without paying any tax on it.
So just how much tax-free interest can you earn?
All South African individual taxpayers are able to earn a certain amount of interest income before it starts attracting income tax. This is called the interest exemption. If you’re under the age of 65, you can earn R23, 800 in interest per year before you start getting taxed for it. If you’re over 65 you can earn up to R34, 500 in interest per year without triggering income tax.
This is a fairly generous amount of tax-free interest income for someone under 65 to earn. With a hypothetical emergency fund of purely interest-bearing instruments and yielding approximately 6% per annum, a taxpayer could hold a balance of almost R400, 000 in cash and not earn enough interest to push them into a tax-paying position.
The previous paragraph was a bit technical, but it boils down to this: Once you’re earning enough interest to get taxed on it (more than R23, 800 for under-65s, more than R34,500 for over-65s), you stop getting a real return from your emergency fund, because income tax eats all of your profit, and even starts nibbling on what you’ve already got.
Spreading some of your interest-generating assets between your spouse or partner, and yourself, will double the amount of tax-free interest that can be earned.
Tax deferred investing
In short though, the value of tax-deferred investing only becomes material when you’re talking about the long-term. If you’re saving for a short-term goal, the fact that you didn’t pay tax on your interest income or dividends is not going to pay for the airline ticket upgrade.
Even after 5 years of investing in a Tax Free Savings Account, and assuming something that pays you predominantly interest income, you still would not be earning more interest than you could earn tax free anyway.
The short and sweet on Tax Free Savings Accounts
If you are one of our younger readers, and you’re committed to some long-term investing towards retirement, there is definite merit in taking out a TFSA, but likely only after you have made contributions to a retirement annuity. Contributing to an RA offers you a 27.5% deduction of amounts contributed whereas the TFSA offers you no such deduction.
In the long-term, you want to maximize your tax-deferred investing, and an RA trumps the TFSA in that respect.
If the thought of taking out an RA at the start of your working career is a little scary, given that you won’t have access to the cash, a blend between maxing your R30, 000 p.a. contribution to a TFSA and an RA could work for you. For example, if you have longer-term ambitions for buying a house, or paying for tertiary education – a TFSA is a good bet.
If you’re well into your working career it is unlikely that a TFSA will offer you too much benefit; unless you’re looking to earn more interest on some cash without paying tax on the interest, or you would like to ear-mark a particular TFSA for your children’s financial needs later in life.
When it comes to a TFSA, its the long-term that matters, but it need not be your long-term.
Some thoughts on ‘saving tax’
There is a perception out there that, by being extremely clever, you can pay less tax.
People also think that if they can find the right tax ‘guy’, that he’ll help them save a bucket-load of tax and get a fat refund.
As a tax advisor, this writer gets asked this all the time, so it’s likely something that weighs on people’s minds – a LOT.
It’s frustrating to get asked this so often as it sounds like people are wasting a lot of time on false and wishful pursuits. There are much better personal finance questions one should be asking – ones that’ll actually make a difference.
Your options for saving tax are limited by tax laws, and a reputable tax practitioner can only operate within the framework of those laws. They can’t make stuff up. If you’re wanting to pay a premium for a tax advisor with the hope of getting a big refund, rather save your money and spend that on a good financial advisor.
So let’s conclude on this and move right along. If you’re a salaried employee and you’re not a small business owner or earning rental income from a property, or from a side gig – you do not have options around structuring your salary to pay less tax.
About paying someone to do your tax for you
Finding a good person to help you with your taxes is not a bad idea. Tax has gotten increasingly complex of late, and it can be daunting to complete a tax return by yourself. The mental stamina and patience required for correcting mistakes with SARS can take months and people generally don’t like to deal with SARS for any longer than they need to. So if you’re uncomfortable with completing a tax return by yourself, then by all means find someone who can help you out.
So who then to turn to, to plug the gap?
All of the questions that TaxTim prompt you for when you’re going through their process, are all designed to make sure that you get every deduction, allowance, and rebate that you’re entitled to. All too often, taxpayers miss out on opportunities to save tax as they either don’t know they are eligible for a deduction, or they give the incorrect information. TaxTim makes sure that this never happens.
Check it out for yourself
We don’t want to write much more about TaxTim, as they’re better at explaining how their product works. Give their site a visit here. Suss out the nuts and bolts, and don’t forget your 10% discount voucher – WELLSPENT19
Retirement Annuities DO work
Simplistically put – If you started a retirement annuity today and made a starting R100, 000 contribution, you would get a deduction of R27, 500 in your current tax year. If your effective rate of tax payable was 30%, you should get a refund from SARS of R8, 250 (R27, 500 x 30%), assuming you don’t owe SARS any other tax.
You’ve effectively saved R100, 000 for retirement, in a way that will maximize your long-term growth, but that only cost you a net R91, 750.
Well done – the South African National Treasury has just subsidized your investment!
Dipping into your provident fund on a change in jobs
If you’re going to withdraw cash from your provident fund when you leave your job, it stings less if the balance of that account isn’t too large. The bigger the balance gets, the more tax you’ll pay. If you think there’s a better investment opportunity for the money (and it had better be pretty good), then seek sound financial advice and put the money to work.
On submitting a tax return; Do I have to?
The general theme to date has been that if you’re simply a salaried employee, who earns below a certain amount of income per year (2016: R350 000), and you don’t earn income on the side, you don’t own assets outside of South Africa above a threshold (R225 000), are not planning on claiming any deductions for things like medical aid and retirement annuities, and didn’t receive a capital gain above the annual abatement amount of R30 000, then you would not have to submit a tax return.
This is because all employers are required by law to submit your salary info and PAYE withheld, directly to SARS twice a year. If your situation is quite simple and uncomplicated, this employer submission is enough for SARS to gain comfort that they’re getting the tax they’re due, direct from your employer.
However, if your circumstances are such that you’re not excused from submitting a tax return, you will have to do so. All the PAYE that your employer had withheld from your salary over the tax year, should already be reflecting on your tax return when you request it – all you need to do, is to check it and add all the extra income and deductions that you’re entitled to.
If you feel comfortable that you don’t need to submit, then that’s great. Relish in your uncomplicated life, and proceed to Step 3.
If, like this, author and the millions of other proletariat who aren’t so keen to stand in SARS queues, you’ll have to brace yourself for the challenge, that is working out what you’re entitled to deduct, what you should be including in your return, and try really hard not to make an error in your tax return. You don’t want to commit the next several months of your life to listening to SARS hold music at their call centre and giving your best effort at a ‘legalese’ type letter as to why SARS should not be levying penalties and interest for an underpayment of tax.
Okay, it’s not all that bad, but twice shy is the person who has ever had to try and have errors rectified on their tax returns.
All is not lost though; enter TaxTim.
TaxTim offer an ingenious service, whereby you can complete your tax return through their super, easy-to-use website, and have your tax return populated by their system, AND have it submitted directly to SARS! This is an unmatched service in SA and quite exemplary, given how difficult it is to deal with SARS, let alone on behalf of hundreds and thousands of other taxpayers.
If you’ve ever requested your tax return on SARS E-Filing and didn’t know your IRP5 from your IRP6, this site is for you.
All of the questions that TaxTim prompt you for when you’re going through their process are designed to make sure that you get every deduction, allowance, and rebate that you’re entitled to. All too often, taxpayers miss out on opportunities to save tax as they either don’t know they are eligible for a deduction, or they give the incorrect information. TaxTim makes sure that this never happens.
It is worthwhile considering the benefits of being knowingly compliant and up to date with SARS on all your returns even if you feel like you might not have to have submitted a return. As much as we like to think that we need only interact with SARS for a momentary crossing of paths during tax season, there are times when you’ll need something from SARS.
SARS issue what is called a tax compliance certificate. Think of it as a certificate of good standing. It is used for all sorts of reasons, including evidencing your tax number, applying to send money offshore, as well as evidencing that you are in fact registered with SARS which is often a requirement when looking to secure loan or mortgage funding.
If you don’t ask, you don’t get
In order to receive any refunds from SARS, you will need to be assessed. That’s just an official word used to say that SARS are in agreement with the fact that what you owe them, or they owe you, is correct. If you don’t submit a tax return, you cannot be assessed. No assessment, no refund.
We’ve written quite a few articles on tax, some of which can be found below.
- Paying tax when retired
- Tax on units trusts
- Tax on retirement annuities explained
- Tax on Life cover and income protection
- How to pay less tax in South Africa
- Should I get a tax-free savings account?
- The quest for the highest after-tax returns