As we head towards the end of the 2021/2022 tax year, now is an opportune time to make sure that you’ve taken advantage of the available tax breaks available to you so as not to leave any ‘free money’ on the table. However, before implementing one or more of the commonly used strategies outlined below, keep in mind that tax planning should form part of the overall planning process and should therefore be approached strategically with a holistic view of your whole portfolio. Here are four ways you can maximise your tax deductions for this year:
Top up your retirement annuity
If you’re contributing towards a retirement annuity, you have until 28 February 2022 to maximise your tax-deductible contributions of up to 27.5% of taxable income towards your RA, keeping in mind the annual maximum of R350 000. If you’re also contributing towards an occupational retirement fund, remember that the tax deduction limit applies to the cumulative total of all your retirement fund contributions. For instance, if you are investing 12% of taxable earnings towards your company pension fund, you can still invest up to 15.5% of your taxable income towards your retirement annuity, being the most flexible vehicle when it comes to topping up your retirement funding. Unit trust retirement annuities are highly flexible and customisable which makes them ideal for ad hoc contributions, especially for those who earn an irregular income, or who earn commission and/or bonuses that are paid out intermittently. They’re also ideal funding structures for business owners who may want to wait for business year-end before finalising the level of their RA contribution. Remember, being an individual retirement fund, RAs provide full flexibility when it comes to structuring of contributions. While you can structure your investment premiums to run as a monthly, quarterly, bi-annual, or annual debit order, you can also choose to make once-off lump sum investments as and when your personal circumstances allow. As such, the weeks leading up to tax year end should be used to determine to what extent you are still able to leverage off the tax deductibility of your RA contributions.
Your financial planner should be in a position to calculate exactly how much you’ve already contributed during the course of the tax year based on your taxable earnings, and the optimal amount at which to top up your RA. At the end of the tax year, your retirement annuity service provider will provide you with an IT3(f) tax certificate which is a summary of the details of all the contributions you made to an RA for the year, and this document will be submitted to SARS as part of your e-filing, forming the basis of the calculation for your tax refund. From a financial planning perspective, a great way to employ the tax refund from your RA contributions is to reinvest the money, once again free from tax, into your RA in the following tax year.
From the perspective of tax-efficiency, a retirement annuity undoubtedly provides investors with the greatest benefits because, not only are the investment premiums tax-deductible, but they are also exempt from tax on dividends and interest, and no CGT is payable on growth earned in the investment, which has the effect of expediting investment growth. Importantly, while the earliest you can access the funds in your RA, there is no legal requirement that you must convert your RA to a compulsory annuity by any age. It is only upon formal retirement from your RA that you may be liable for tax if make a lump sum withdrawal, although this will depend on whether you’ve made any previous withdrawals from your retirement funds and the amount you wish to withdraw. Retirement annuities are also effective when it comes to reducing taxes on death as they funds held in your RA are deemed to all outside your deceased estate and are therefore not estate dutiable.
If you don’t already have a retirement annuity in place and have spare cash to invest, consider setting up an RA before the end of the 2021/2022 tax year so as to benefit from tax returns in the current year. Keep in mind that it takes a few days to complete the application forms and transfer the funds, so be sure to get the ball rolling sooner rather than later.
Maximise your tax-free savings
Tax-free savings accounts (TFSA) also offer tax benefits to investors to the extent that no tax is paid on dividends and interest earned in the investment, and no capital gains tax is paid on investment growth or when disinvesting. However, keep in mind that your contributions towards a TFSA are made with after-tax money meaning that you cannot claim tax back on your investment premiums. A distinct difference between RAs and TFSAs is that the underlying investment strategy of your TFSA is not subject to Regulation 28 of the Pension Funds Act which currently limits equity exposure to 70% of one’s portfolio and offshore exposure to 30%. This means that, as an investor, you can take on much more investment risk in a TFSA structure which is well-suited to a longer time horizon. As it currently stands, legislation permits you to invest R36 000 per year towards a tax-free savings account with a total lifetime contribution of R500 000. What is important to bear in mind is that the tax benefits achieved by investing in a TFSA are not realised early on, with the investment returns and tax saving only really becoming meaningful after about ten years. As a result, TFSAs actually make better long-term investment vehicles and can be used constructively to supplement your retirement savings. While you are permitted to have as many TFSAs as you like, keeping tabs on your annual contributions can become a challenge. Remember, any contributions over the R36 000 per year limit will be subject to tax at 40% regardless of your personal tax rate, so staying within your investment is advisable. Once you’ve maximised your tax-deductible contributions towards your RA, channelling surplus cash towards a TFSA before the end of the tax year is an excellent option.
Use your CGT exemption wisely
If you are an individual investor, you can use your annual capital gains tax exemption, being the first R40 000 of gains made on your investment portfolio, to rebalance their portfolios if necessary. While 40% of any gain triggered in a tax year is included in your taxable income, the annual exclusion can provide investors with an opportunity to review and potentially rebalance their investments in order to keep them aligned with their goals and objectives. Often referred to as ‘switching’, rebalancing really means adjusting the asset allocation in your portfolio where appropriate to make sure that your investment strategy remains on track. In rebalancing your investment portfolio, keep in mind that your base cost will be reset at a higher level which, in turn has the effect of reducing the gain if and when you sell unit trusts in the future. Rebalancing can also take place when you choose to make additional contributions or withdrawals from your unit trust portfolio. Remember, if you’re invested through a multi-manager, part of the multi-manager’s function is to rebalance your portfolio throughout the year, so it is important to check whether any other CGT events have taken place in your portfolio during the course of the tax year. While some advisors recommend annual rebalancing, taking advantage of the CGT exemption should not be the only factor driving your decision. If you’re invested for the long-term, a comprehensive annual review of your overall investment portfolio will reveal whether or not there is a need to rebalance and/or adjust your investment strategy. However, if you feel that your circumstances have changed, your goals have been recalibrated, or your investment strategy is too risky for your appetite, you may want to consider rebalancing your portfolio before the end of the tax year.
Take advantage of donations tax exemptions
If charitable giving is important to you, keep in mind that the Income Tax Act provides exemptions on donations made to certain charities. Recognising that many organisations are dependent on the charitable giving of the South African public, Section 18A allows individuals to donate up to 10% of their taxable earnings towards an approved Public Benefit Organisation (PBO) on a tax-deductible basis. The key to qualifying for this tax deduction is, however, to ensure that you are donating to a PBO is that is registered as such with SARS, keeping in mind that the tax exemption must be approved by the SARS Tax Exemption Unit (TEU). If you’re unsure whether the charity you are donating to is registered as a PBO, you can ask them for proof that they are a registered Section 18A institution. If duly registered, you can request a Section 18A certificate from your PBO at the end of the tax year which will provide proof of your donations during the course of the tax year when doing your e-filing. When requesting the Section 18A certificate, ensure that it includes essential information including the PBO’s reference number, date of receipt of the donation, the name and address of the donor, and the amount or nature of the donation. If you have not yet made any charitable donations during this tax year, you can do so by making a once-off contribution of up to 10% of your taxable earnings to a duly registered PBO. To make it easier for taxpayers, SARS as published an up-to-date list of all Section 18A approved PBOs on their website at www.sars.gov.za/businesses-and-employers/tax-exempt-organisations.
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