How you can pay less tax in South Africa

South Africans can minimise their tax burden by investing through a tax-free investment account and by regularly contributing to a retirement annuity (RA). 

There has been much talk about how South Africans can reduce their tax burden as the government looks to raise additional revenue to fund its spending plans. 

The Finance Minister has proposed a one percentage point VAT increase split over the next two years and did not provide any relief for personal income taxpayers by adjusting the tax brackets in line with inflation. 

There have also been concerns that a wealth tax may be imposed in South Africa, with the National Treasury confirming it was studying the feasibility of such a proposal. 

In such an environment, it is prudent to take advantage of the tax benefits that are still in place over the coming financial year, the head of fiduciary and tax at Sanlam Private Wealth, Stanley Broun, said.

To make the most of the available tax breaks, Sanlam Private Wealth advised clients to –

• Open a tax-free savings account (TFSA) or add to an existing TFSA, with individuals being allowed to contribute up to R36,000 per financial year and R500,000 over their lifetime
• Make a lump-sum, tax-deductible contribution to a retirement annuity, or increase the monthly RA debit order

One way to capitalise on existing tax breaks is by contributing to a TFSA – you’ll pay no tax on interest, dividends or capital gains, Broun said.  

TFSAs offer different investment options to suit your objectives and risk profile. Sanlam Private Wealth, for example, has three funds available to you to invest in a TFSA. 

In addition, a TFSA provides you with a unique opportunity to use your annual donations tax exemption to donate up to R100,000 (R200,000 if each spouse makes use of his or her exemptions) per year to your children without incurring donations tax. 

It can provide you with an alternative estate planning tool, as the funds will be invested in your children’s names in a tax-efficient investment.

Investing in an RA is slightly different, with any amount invested being tax deductible up to R350,000 in a financial year. 

For instance, if you fall into the 45% tax bracket and contribute R100,000 to your RA, your actual cost is only R55,000, as SARS covers the remaining amount.

While withdrawals at retirement are subject to tax, the overall tax burden is typically lower due to tax-free portions of the lump sum and additional rebates for individuals aged 65 and older.

Individuals also do not pay any dividend tax in an RA, while income an capital gains tax do not apply to the assets managed. 

Broun said it is important to remember that you can contribute to an RA even if you are also contributing to a pension or provident fund. 

An important consideration when investing in an RA is whether you are looking to leave South Africa, with legislation changes likely to impact this investment. 

Until 1 March 2021, if you formally emigrated from an exchange control perspective, you could withdraw and externalise the pre-retirement capital from your RA after paying the retirement lump-sum tax.

As of 1 March 2021, you can now only access the pre-retirement lump-sum benefits of your RA if you’ve ceased to be an SA tax resident and remained a non-SA tax resident for an uninterrupted period of three years or more.

With regard to preservation funds, if you’ve already used the one-off withdrawal allowed before retirement, as of 1 March 2021, you will now also be able to withdraw the full fund value under the same conditions.

If you did not make use of the one-off pre-retirement withdrawal from your preservation fund, the new laws won’t apply, and you will, if you ceased to be an SA tax resident, continue to have immediate and full access to the full withdrawal benefit, subject to lump-sum tax.

The three-year waiting period therefore doesn’t impact all retirement funds. It applies only to RAs and to preservation funds where the one-off pre-retirement withdrawal has been utilised.