How to bring down your tax burden
12 July 2016, 19:24
Cape Town - Did you know there are ways in which you can reduce your tax burden?
With the the new income tax filing season having opened on July 1, it's certain that no one can escape the noose of the taxman. But there are ways individuals and even in some cases companies and trusts can lessen their income tax liability, according to Judy Snyman, fiduciary specialist at AlphaWealth. Here are her suggestions:
Tax-free savings accounts
Tax-free savings accounts are a savings product introduced in South Africa in March 2015. These accounts allow you to save a maximum of R30 000 per year and R500 000 in your lifetime. You save in a specially designated fund/account without having to pay any tax on capital gains or the interest or dividends received on these investments.
This is different to a pension/retirement annuity where your main tax saving is on your upfront contribution.
Pension, provident funds and retirement annuities
Pension funds and retirement annuities (RAs) offer individuals considerable tax benefits. The three main ones are:
1. Contributions are tax deductible – you may deduct up to 27.5% of your gross remuneration or taxable income (whichever is the higher) in respect of your total contributions to a pension, provident or RA fund, subject to an annual limit of R350 000.
2. Investment returns are tax free – there is no income tax or capital gains tax on the investment return earned in a RA.
3. Benefits are taxed on a favourable basis – lump sum benefits are taxed on a sliding scale with a portion of the benefit tax free.
Medical aid contributions
All individual taxpayers receive a monthly medical scheme contribution tax credit. For taxpayers under 65, this is as follows:
Taxpayers are also able to deduct certain qualifying out-of-pocket medical expenses incurred during the tax year.
Donations to charities
Taxpayers, including companies and trusts, can donate up to 10% of their taxable income to public benefit organisations (PBOs) and claim a tax deduction on this donation, as long as these PBOs are registered with the South African Revenue Service and issue a valid tax certificate for all donations received.
Deductions for rental properties
You can deduct certain expenses from income received from your rental property. This includes the interest portion of your mortgage bond if the property is bonded, levies, rates and taxes, insurance premiums, rental agent’s commission, repairs and maintenance costs and bank charges.
Section 12J venture capital companies
Have you considered investing in venture capital companies (VCCs)? Investors are entitled to deduct the full amount of their investment from their taxable income in the tax year. The tax relief is 41% for individuals and trusts and 28% for companies, which significantly enhances the potential return and helps to mitigate the investment risk.
Through these types of companies, the government aims to stimulate the economy and promote investment in South African small and medium-sized businesses, while providing tax benefits to investors. The VCC regime is subject to a 12-year sunset clause which ends on June 30 2021.
The tax benefits involved in investing in a VCC are:
- The full amount invested in a VCC is 100% deductible from your taxable income in the year in which the investment is made. This applies to individuals, companies and trusts.
- An investor in a VCC will therefore obtain a 41% tax break (for an individual taxpayer at maximum marginal rate) at the time of investment.
- If the investment is held for five years, there is no tax recoupment.
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