Checklist: Things to do before the end of the tax-year

The month of February is always fairly frantic in the world of financial planning as taxpayers take steps to reduce their overall tax liability. Generally speaking, tax is the single biggest drain on individuals’ wealth and using all available mechanisms to reduce one’s tax obligations is an important part of the financial planning process. Working with your financial advisor and/or tax planner, consider the following tools for curtailing your tax bill.

(i) Maximise your tax-deductible contributions to a retirement fund

If you haven’t already done so, you have a few weeks left to maximise the tax-deductible contributions towards your retirement annuity. The Income Tax Act allows taxpayers to invest up to 27.5% of their taxable income per year, capped at R350 000 per year, towards a retirement fund – including pension, provident and RA funds – on a tax-deductible basis meaning that at the end of the tax year, the taxpayer can claim back the tax on his/her retirement fund contributions. This is a significant benefit as it effectively allows investors to invest with pre-tax money thereby reducing the amount of tax payable to SARS. And, while these tax-deductible premiums have an annual cap of R350 000, investors are able to invest in excess of this cap while still reaping tax benefits. This is because any amount that you contribute over the annual cap of R350 000 will keep rolling over until you formally retire from the fund at which point those over-contributions can be used in one of two ways: In the first instance, you can use the excess contributions as a tax-free portion to withdraw in addition to the R500 000 tax-free amount that investors are eligible for at formal retirement. Secondly, you can use the over-contributions to write off any income tax payable in your living annuity, keeping in mind that that income drawn will be taxed at your marginal tax rate.

To do: If you have multiple sources of income and/or are unsure how to calculate your taxable income, ask your tax practitioner or financial advisor to assist with the calculation, keeping in mind that rental income, dividends from REITs, gains derived from realising assets, and interest earned on investments are included in calculating your taxable income. To qualify for a tax deduction in the current tax year, you will need to ensure that your application forms are processed and that the funds reflect in your retirement annuity before 28 February 2023, so be sure to check the deadlines with your financial advisor.

(ii) Leverage the long-term tax benefits of your TFSA

While your contributions to tax-free investments are not tax deductible, the fact that all interest income, capital gains and dividends earned in such vehicles are exempt from tax means that there are long-term benefits to investing in tax-free savings accounts albeit the annual and lifetime contribution allowances remain low. The investment returns and tax saving in a tax-free savings vehicle only really become meaningful after about ten years meaning that investors should take a long-term view of the money held in these accounts. As legislation currently stands, you can invest a maximum of R36 000 per year towards tax-free savings with a lifetime contribution maximum of R500 000 which, while not sufficient as a retirement funding vehicle, can be used to supplement one’s long-term savings. What is important is to understand are the withdrawal rules pertaining to tax-free savings to ensure that you don’t inadvertently frustrate the long-term benefits. Any withdrawal made from a tax-free savings account is deducted from your lifetime contribution of R500 000. So, if you have contributed a total of R300 000 towards your tax-free savings and you withdraw R50 000, you will still only have an R200 000 lifetime contribution available to you. In other words, you can’t top up your account after a withdrawal and any withdrawal will result in you forfeiting your tax benefits while at the same time wasting part of your lifetime contribution and losing out on potential investment returns.

To do: Check your statement to determine exactly how much you have already contributed towards your tax-free investment during the current tax year. Remember, if you contribute more than your annual allowable amount of R36 000, you will pay a tax penalty of R40% regardless of your personal income tax rate. If you are contributing towards multiple tax-free savings accounts, keep in mind that the annual contribution limit is cumulative across all tax-free investments.

(iii) Obtain proof of your donations towards a PBO

The Income Tax Act allows taxpayers to donate up to 10% of their taxable income towards certain charitable organisations on a tax-deductible basis, but keep in mind that this tax deduction is now automatic. This is because only bona fide donations made towards registered Public Benefit Organisations (PBOs) who are duly registered in terms of Section 18A of the Act qualify for a tax deduction. Note that a bona fide donation is defined as one that is made with ‘no strings attached’ and therefore cannot be for the benefit of the donor or a person connected to the donor. Non-profits are required to register as a PBO with SARS in order to receive a tax exemption, and this tax exemption must be approved by the SARS Tax Exemption Unit (TEU). If approved, taxpayers can claim a tax deduction if in receipt of a Section 18A certificate issued by the PBO. So, if you’ve been donating to a registered PBO during this tax year, now is the time to ensure that you have the necessary documentary proof so that you can claim the deduction.

To do: Contact your registered PBO and request a copy of your Section 18A certificate which needs to include the PBO’s reference number, date of receipt of the donation, your full name and address, and the amount or nature of the donation. To claim the deduction, you will need to upload your Section 18A certificate when doing your eFiling.

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