With only a few weeks to go before the end of the 2022/2023 tax year, now’s the time to focus on reducing your tax liability and maximising your savings. Tax planning is a fundamental component of any financial plan worth its salt, so ensure that you start the new calendar year with firm intentions to end the current financial year expediently. Here’s how:
(i) Use your RA in a tax-efficient manner
If you are contributing towards a retirement annuity, take full advantage of the tax benefits afforded by maximising your tax-deductible contributions before the end of the tax year. Remember, as retirement fund investor, you can invest up to 27.5% of your annual taxable income up to maximum of R350 000 per year on a tax-deductible basis which is a significant tax saving. If you don’t yet have a retirement annuity in place, there is still time to set one up and make a lump sum contribution before the end of the tax year so as to reduce your tax liability. There is no limit to the number of retirement funds you can contribute to which means that, if you’re contributing to an occupational fund such as a pension fund, you can set up a retirement annuity to maximise your retirement fund contributions. That said, keep in mind that the tax deduction limit of 27.5% is calculated as a cumulative total of all your retirement fund contributions and not per investment. Remember, over and above the tax-deductibility of your RA premiums, the funds held in your investment enjoy substantial tax benefits in that they are exempt from tax on dividends and interest earned in the fund and no capital gains tax is payable on investment growth, which as the effect of expediting investment growth.
To use your retirement annuity effectively before the end of the tax-year, calculate the cumulative amount that you’ve contributed towards your various retirement funds in the current tax year as a percentage of your annual taxable earnings. The difference between 27.5% and the percentage that you’ve already contributed is available to invest on a tax-deductible basis before year-end. At the close of the tax-year, your retirement annuity service provider will issue an IT3(f) tax certificate summarising the contributions you have made towards your RA in the 2022/2023 tax year which will then form the basis of the calculation for your tax refund. Once you’ve received the tax refund from your RA contributions, consider using the money to reinvest into your retirement annuity in the 2023/2024 tax year to reduce your tax liability in subsequent years.
Note: There is a wide range of retirement annuity service providers and funds to choose from and selecting a fund that is best suited to your needs may appear daunting, so ideally seek advice from an independent financial planner who is not affiliated with any particular service provider. Also, be sure to understand the fee structure of your retirement annuity to ensure that excessive fees do not erode your investment returns.
(ii) Maximise your tax-free savings
Once you’ve maximised your retirement fund contributions, consider enhancing your long-term savings by investing through a tax-free savings account (TFSA). Or, if you already have a TFSA in place, consider maximising your annual allowable contributions. While it is important to note that contributions made towards tax-free investment are not tax deductible, there are still benefits to this type of investment in 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. The nature of these tax benefits is that they are generally only realised over an investment period of ten years or more meaning that TFSAs should be considered long-term investments. Current legislation permits investors to contribute a cumulative annual amount of R36 000 per year towards tax-free savings investments with a total lifetime contribution of R500 000 – and while this contribution level is relatively low, there are gains to be made if you’re invested for growth over a long period of time.
Note: 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.
(iii) Use your donations tax exemptions
If you’ve made donations to a registered Public Benefit Organisation (PBO) during the course of the tax year, you may use your donations tax exemption to reduce your tax bill – and, if you haven’t yet made any charitable donations, there is still time before the end of the year to do so, but ensure that your chosen charity is duly registered with SARS in terms of Section 18A of the Income Tax Act. 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 PBOs on a tax-deductible basis. Section 18A certificates are granted by the Tax Exemption Unit office of SARS and are only provided to specific organisations which use the donations to fund specific Public Benefit Activities. If you make a bona fide donation to a Section 18A-approved organisation, you are entitled to a tax deduction although it is important that you submit the necessary documentation as proof of your donation when doing your e-filing which includes the PBO’s reference number, date of receipt of the donation, and the amount or nature of the donation.
Note: Beware of scam charities and organisations, and be sure to undertake due diligence before making a donation. Be sure to check the SARS website which provides a list of all Section 18A approved PBOs: www.sars.gov.za. Make sure that you obtain receipts for all donations made, and that all receipts reflect the organisation’s credentials, address, contact details and registration numbers.
While these mechanisms can be used to reduce your tax bill, keep in mind that implementation should form part of a broader planning strategy designed to fortify your finances and growth your wealth over time. Ideally, engage with an independent financial advisor who can give you further insight into these and other mechanisms for reducing your tax liability.
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