How to pay as little tax as possible in South Africa
While paying taxes is essential to the economy, it can be an expensive burden on individuals. Fortunately, there are a number of ways you can cut back on your debt to the taxman.
This was explained by Nicci Courtney-Clark, head of Tax at TaxTim and Bronwen Trower, co-portfolio manager at Investec Wealth & Investments, on the Everything Counts podcast.
They emphasised that while there are a number of ways to maximise your tax-free savings and investments, regardless of the method you choose, it is crucial to file your taxes on time with all the required documents.
If you miss the deadline, the South African Revenue Service (SARS) slaps on administration penalties very quickly, Courtney-Clark said, “and they’ve actually got a lot stricter in recent years”.
This admin fee can be charged as quickly as one day after missing the deadline and can vary from about R250 to as much as R16,000, depending on your income level.
“That is automated and it will be applied every single month until you file your return or until you bring your return up to date,” she said.
In other words, if you do not pay this penalty, it will continue to increase every month until you do.
They said that not knowing your rights is one of the major ways people end up losing out on potential tax benefits.
“Everything could be there in the auto assessment, but if you’re not putting in certain information for your deductions, you’re missing out,” Trower said.
For example, recently, a tax rebate was introduced for solar users. If you do not inform SARS that you bought solar panels in the stipulated time, you could miss out on this benefit.
It is also essential to make sure your admin is in order, Trower advised. This means keeping all of your documents, like medical and donations tax certificates, throughout the year so you are prepared for filing season.
That also helps in situations where you may have penalties or audits, and you already have all your information in one place.
Tax-Free Savings Account
In South Africa, a tax-free savings account (TFSA) allows individuals to save without paying tax on their investments, Courtney-Clark said.
You can deposit up to R36,000 per year, with a lifetime contribution limit of R500,000. If you deposit the maximum every year, it will take about 14 years to reach the lifetime limit.
“So this is really a great way to grow your savings without the tax burden,” she said.
Most banks offer TFSAs where funds are invested in options like unit trusts, fixed deposits, bonds, or regular savings accounts.
Once your savings mature, you can withdraw all funds, including any growth, without paying taxes on the amount.
However, Courtney-Clark warned that some people invest in multiple TFSAs across different bank accounts, which ultimately exceed the R36,000 limit. When this happens, SARS will immediately slap you with a 40% penalty.
Retirement
Retirement is another way to maximise your tax-free income. However, “SARS only gives you a benefit if they’re going to get something in the end,” Trower said. “SARS is SARS at the end of the day.”
When SARS doesn’t give you the benefit, it generally means that the payout is not going to be taxed, which is very, very rare when it comes to retirement contributions in this country.
As for retirement savings, these accounts offer different tax benefits. Contributions to retirement accounts up to 27.5% of your annual income (capped at R350,000) can be deducted from your taxable income, giving you a tax break now.
However, when you eventually withdraw these retirement funds, they will be subject to tax at retirement.
When filing your tax return in South Africa, it’s crucial to have all the required documents ready to claim your benefits effectively:
- Retirement Annuity (RA) Contributions: You’ll need to get a tax certificate, known as the IT3(f) certificate, from the financial institution managing your RA. Include this in your tax return to claim the relevant tax deduction.
- Employer-Sponsored Pension and Provident Funds: Contributions to pension and provident funds are usually deducted from your salary and appear on your IRP5 certificate. Since these are already reflected on your IRP5, they are automatically included in your tax return, so you don’t need to add them again.
Donations
Courtney-Clark explained that donating to specific charities in South Africa can be a great way to support causes you care about while also potentially lowering your tax bill.
To qualify for tax deductions, the organisation you donate to must be a registered Public Benefit Organisation (PBO) with SARS, meaning it operates on a non-profit basis and is tax-exempt.
Eligible charities include well-known organisations like the SPCA and even some neighbourhood watch groups, provided they are set up as PBOs.
It is important to note that there is a cap on the deductible amount – you can only claim up to 10% of your taxable income for these donations.
To ensure you receive the deduction, it is essential to keep proper documentation. You will need to request a Section 18A tax certificate from the charity, which should include the PBO number.
This number must be reported on your tax return for verification by SARS.
“This is a great way to save for a cause that’s close to your heart and also reduce your tax bill,” Courtney-Clark said.
Work from home
Courtney-Clark explained that working from home can be another way to reduce your tax burden, but it is tricky to navigate.
This is because claiming a home office deduction in South Africa can be complex due to strict criteria and required documentation.
To qualify, you must work from home for more than 50% of your time and have a dedicated, separate space in your home solely for work purposes.
This is done by getting a letter from your employer which clearly states the percentage that you work from home, which SARS will use as proof.
“It has to be on the employer’s letterhead and signed off by the employer,” she said.
If these conditions are met, you can deduct a portion of various home expenses such as rent, electricity, rates, taxes, and cleaning costs.
However, some costs, like bond interest and internet charges, generally aren’t deductible unless you’re a freelancer or earn a commission.
Additionally, you can claim wear and tear on office equipment or furniture purchased for your home office, like printers or desks.
For these claims, you’ll need to calculate the percentage of your home used as an office by comparing the office space’s square footage to your entire home.
Keep detailed records, as SARS requires extensive documentation. This includes photos showing that your office is strictly a workspace, home layout plans, proof of expenses (utility bills, rental agreements), and a letter from your employer confirming your work-from-home status.
Rooms used for multiple purposes, such as a guest room, won’t qualify for this deduction if they’re not solely dedicated to work.
“We see a lot of claims being rejected because people are unaware of the exclusivity requirements and the need for a separate room and a separate home office. It must be specifically set up for the taxpayers’ trade,” Courtney-Clark explained.
“For example, if you work from a dining room table, that won’t qualify for the home office deduction. If you work in the morning from a room which doubles up as your child’s playroom, that also won’t qualify.”
SARS is very strict and requests 360-degree view photographs of the room in question.
They want to see every angle of the room, and if they spot things like toys or gym equipment which leads them to believe that it’s not exclusively used as a home office – you won’t be eligible to claim.
Medical Aid
According to Courtney-Clark, if you contribute to a medical aid scheme in South Africa, you qualify for a medical aid tax credit, which is a fixed reduction on your tax bill based on the number of dependents in your medical aid plan.
In addition to this, you may be eligible for an additional medical tax credit if you’ve had out-of-pocket expenses, such as doctor-prescribed medicines or doctor’s bills, that were not reimbursed by the medical aid.
However, this additional credit does not cover over-the-counter medicines, like vitamins or general pharmacy items.
It is worth noting that these out-of-pocket medical credits are only granted if the expenses are significant enough, as SARS applies a complex formula based on your taxable income.
So, simply paying out-of-pocket doesn’t guarantee an extra credit unless your expenses reach a certain threshold.
If you also cover medical aid for a family member, such as a grandparent, on a separate plan, you may be able to claim a deduction for that as well, provided you are the payer, Trower said.
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