Matthew Lester’s tequila-tax-double-dip cocktail. Don’t lose out on that deduction.

As the Pointers for Pravin are collected, all eyes are as much on the budget as his future. The rumours point to a cabinet reshuffle, but we’ve learnt to live in hope, and that we’ll see him on February the 22nd. But in the piece below, tax guru Matthew Lester is not predicting the outcomes of the speech or Pravin’s future, he’s looking at ways for citizens to score on their year-end tax return. He’s conjured up a double-dip tax cocktail, that should have all taxpayers interested. Well worth the time. – Stuart Lowman

By Matthew Lester*

22 February 2017 is South Africa’s national budget day. And there is a lot of doom and gloom in the press covering the almost inevitable announcement from Finance Minister Pravin Gordhan – ‘Personal Tax increase. Concentrated on the higher end taxpayer.’ It’s music to slit your wrists by.

Matthew Lester

This clashes with the spirit of international tequila day, also on 22 February. So let’s do a ‘whoop whoop’ and see if we can score a healthy tax refund for the 2016/17 tax year that will score a bigger tax refund than any tax increase can take in 2017/18.

It’s February, the last month of the tax year. Employed taxpayers are not spoilt for choice. There is nothing that can be legally done to undo income that has already been received or accrued. And most tax deductions of employees are disallowed by section 23M that scuppers almost all tax deductions. So most just reach for the bottle, debit experience and credit the bank.

Some go out and buy a new car in February. ‘It’s for my tax’ they say. But it has the same effect as throwing a muffin at the Milky Way.

But, if you are serious about financial/tax/wealth planning I can help some taxpayers score a tax saving that will outstrip any personal tax increase that will come our way in 2018.

So here’s my cocktail

NRFI (Non-retirement funding income)

For many years professors have successfully failed rafts of tax students with the NRFI calculation, an old appalling formula that must have been drafted by someone with a tormented mind. The formula established the extent of the tax deduction on retirement annuity fund contributions.

Pravin Gordhan, South Africa’s finance minister. Photographer: Waldo Swiegers/Bloomberg

Fortunately, I don’t have to explain NRFI as it was finally euthanased from the tax act with effect from 1 March 2016. Let’s just say that the NRFI formula was heavily prejudiced against the employed taxpayer, allowing for a pitifully low tax deductible retirement annuity fund contribution.

The new formula allows the taxpayer to make tax deductible contributions to all retirement funds based on the formula

  • 27.5% of taxable income
  • Limited to R350,000 per annum

The formula attracted much criticism because it capped off the multi-million-rand tax deductible retirement annuity contributions made by the extremely wealthy. But that’s another story.

Now watch this example for an employed taxpayer earning R1 million per annum pensionable income from an employer. Presume further that the taxpayer’s employer contribution to pension fund or provident fund was 15 % of earnings. Last year the tax deductible retirement annuity contribution was miserable as the pensionable income was excluded by the NRFI formula.

But in the 2016/17 tax year the tax deductible contribution is calculated as follows:

Taxable income R1,000,000
deductible retirement fund contribution at 27,5% R275,000
Less pension/Provident fund contribution @15% R150,000
Additional tax deductible RA contribution R125,000
Tax saving on assessment @41% R51,250

Now SARS can do a handstand and sing ‘Umshini Wam’ but there is nothing they can or would want to do about that. The taxpayer is a fine upstanding citizen providing for retirement.

And when the tax refund arrives, well, we plug into next year’s retirement annuity fund contribution and achieve the legendary ‘double dip,’ the ultimate prize in tax planning.

SARS-Biznews.comNow taxpayers say ‘where do I find the money for the additional retirement annuity fund contribution. ‘I’m broke! I’ve just paid for the annual holiday, back to school and paid my alimony up to date.’

The answer is ‘beg, steal or borrow! But never lose out on a tax deduction!’ Actually most taxpayers will not be doing much wrong if they draw down their advance payments on their home loans to make their tax deductible RA contribution.

This is not rocket science. Any competent financial advisor should be able to facilitate the deal. Actually, if they were doing their jobs, they should have contacted you already.

If they haven’t perhaps they owe me a bottle of tequila.

  • Rhodes University Professor Matthew Lester was educated at St Johns College, Wits and Rhodes universities. He is a chartered accountant who has worked at Deloitte, SARS and BDO. A member of the Davis Tax Committee investigating the structure of aspects of the RSA tax system, he is based in Grahamstown. Follow him @ProfMattLester.
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