Article written by WellSpent
I am sure that many of us have thought about how we can pay less tax. As you’ve worked through the tax season, you’ve likely reflected on the amount of money you’ve handed over to SARS this last tax year.
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.
Tax advisors get 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. 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. Allow us to give you an honest account as to what your options really are and how important tax advice is – or isn’t.
Your expense account is not what it used to be.
Our tax laws, especially around remuneration (the stuff you get paid by your employer every month) have come a long way in the last 10 years. Way back when the West was wilder – it seemed like everyone had a car, travel and cellphone allowance.
The old days of salary structuring are essentially over. If your employer has agreed to pay you an amount of R25, 000 per month – you will pay tax on this amount, no matter how you try and carve it up between allowances and benefits. In most cases, employers don’t give you options. Simply because if they get it wrong, they are responsible for the PAYE that SARS should have received. It’s not worth their while to try and structure a package for you.
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.
Tax Guys are helpful, but for boring reasons
Finding a good person to help you with your taxes is not a bad idea. Tax has become 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. 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 find someone who can help you out. See what they do and give it a go next year. If your circumstances don’t change, it’s unlikely that how you complete your tax return will change much either.
If you’re a salaried employee and not a business owner, then finding someone to help you with your tax should only be driven by your desire to get your taxes done quickly and correctly. Not be because you think a very clever advisor will save you lots of money. That doesn’t happen. It cannot. You’ll notice how emphatic I’m being here. That’s because “Oh you’re a tax consultant, can you get me a huge refund?” is as annoying as “Oh, you’re a comedian, tell me a joke.”
Your options 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.
Common-sense tax savings.
There are ways to pay less tax, but they don’t involve clever maneuvering or allowances. Come to think of it, we’ve discussed most of them already at WellSpent, but to put this discussion to rest, we’ll list the biggest and easiest to achieve.
Contributions to a pension, provident or retirement annuity fund
This is by far the most common and effective way to reduce your annual tax bill. The laws around making contributions to retirement annuities, pension, and provident funds have changed recently. You can now get a whopping 27.5% deduction for amounts contributed to your retirement. The general rule is that this deduction is limited to R350, 000 per tax year.
So let’s just assume that you have some idle cash lying around, perhaps money in an emergency fund that is superfluous to your needs; let’s go with R100, 000.
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!
Why not use your SARS refund money to start a Tax-Free Savings Account and see how big you can get it, all with refunds from SARS.
Making a donation to a Public Benefit Organisation.
Making donations to Public Benefit Organisations, registered such that they can issue an 18A certificates, will allow for the deduction of donations made from taxable income. Deductions of this nature are capped at 10% of taxable income.
You may feel that the government is incapable of spending your money wisely. If that’s the case, you could identify a charity or other Public Benefit Organisation that is doing work you think is important, and give them a big chunk of your tax bill.
Manage your interest income
As a natural person, you’re eligible to earn a certain amount of interest income per year, without paying tax on that amount. At present, that amount of interest is R22, 800 p.a. Earn any more than that, and you start paying tax at your marginal rate of tax.
If you are in a position that you need to hold a certain amount of stable value for a short term need or goal, consider splitting some of your investment in something that is not interest bearing – just enough to avoid paying unnecessary tax on your return.
In our article on emergency funds, we mentioned a stable fund. These are unit trusts that might consist of half interest-bearing instruments and half dividend income. The Dividend Tax you would pay on your dividends at 20% (from March 2017 onward) is most likely a lot less than your marginal tax rate.
There are many stable funds on offer. Do some Googling and investigate some.
Be aware that earning slightly more interest in a tax year that is tax-free, is likely to push you over the provisional taxpayer threshold. This would require provisional taxpayer registration. This is not too dire. It does add more tax return complexity to your life. It also means you need to submit additional tax returns to SARS during the tax year.
There are quite a few legitimate ways to save on tax, and no sneaky, brilliant scheme ways. So, no, I can’t get you a huge refund. Kindly stop asking.