How to slash your tax bill, from RAs and 12J companies to tax harvesting
There are no tax loopholes in SA, but there are steps you can take to reduce your taxable income – and keep the difference to boost your own personal wealth. Independent financial advisor Candice Paine, of PR Financial Services, shares her top tips to cut your income tax bill – now and over the next year. – Jackie Cameron.
Candice Paine on cutting your tax bill:
It is hard to cut your income tax bill, there are very few options that you have left. But the ones that we do have left can contribute quite largely to reducing that taxable income. What you're trying to do is reduce your taxable income, because your marginal tax rate is based on the actual rand amount of taxable income. There are two groupings that you need to be aware of. One is has an immediate reduction in your taxable income, which means that, as we hit the tax year in at the end of February, you'll get an immediate reduction in taxable income.
The other group which will speak to a bit later is is longer-term. So involves a little bit more tax planning and vigilance around how you plan your tax. So the most obvious one is your contributions to your pension funds – that your provident fund, your pension fund or your retirement annuity. This is arguably the biggest tax saving that you can have. So the way that you calculate this, is that you can contribute 27,5% of your taxable income to your retirement annuity.
That reduces the tax that you actually pay, and it's a saving. You're saving in your retirement annuity and you're saving tax free in your retirement annuity. The other one is probably a little bit more controversial, but it is donating to PBO's – which are your public benefit organisation. If you make a donation to a charity that is registered as a PBO, you can reduce your taxable income by the amount of that donation – up to a maximum of 10% of your income.
If you, for example, are donating to the SPCA or to any other PBO, that is a reduction in your taxable income. The third one where you can immediately reduce the taxable income is through Section 12J companies. They can also substantially reduce the taxable income that you pay and you're actually investing in sort of a venture capital company. Those are the ones that you could do now before the end of February.
Comment from Peter Comrie:
People will give to PBOs after having read this, however you can ONLY get a tax deduction if the PBO has the ability to issue 18A certificates. This is very important, I am on the board of 10 different PBOs, but only 3 of them can issue 18A certificates.
Hope this is helpful for your readers in avoiding any unpleasant results in their tax returns as they give funds to PBOs.
On making the tax saving and building wealth:
There has been a lot of controversy around whether you keep saving in your retirement annuities or whether you forego that tax saving and actually put the money offshore. What we're seeing right now is what investment markets do. There's a turnaround in investment performance. Suddenly, the South African market is firing ahead and the rand has strengthened precipitously. So anyone who made that decision towards the end of last year would be underwater.
I think what you need to do is have a two-pronged approach. If your concern is that you're limited in how you can invest your retirement annuity, maybe only put half of the contributions into the retirement annuity. So you still get half of that income tax benefit and the other half you potentially put into your tax free savings account, where your tax saving comes at the end of the investment period.
Some people have done the math on what you need to earn on an offshore investment to make up for that tax benefit that you forego. It's something between the region of 2% and 3% of performance per annum for you to be in a similar position. There's no silver bullet with investing and you can do things in halves. Reduce your contribution to your retirement annuity by half and put the other into a tax free saving. But whatever you do, save the money.
On 12J investments:
It's not only for the richer people, but the minimum contribution in South Africa, seems to be around about R100,000. What that would do is effectively reduce your taxable income, by the contributions. There's a window period to take advantage of the 12J and what our government had done was set up these companies to help in various industries.
So one of them is hospitality, which has unfortunately been really hard hit through covid. It's to create jobs and support those sorts of industries. Companies were set up. They could take contributions from individuals into these 12J. You're locked in there for five years, otherwise you don't get the tax benefit. Obviously, it's a very high-risk investment.
There's a lot of due diligence that you need to do before you just go and invest in a Section 12J. But it does come with a health warning. You need to do your due diligence (or your financial adviser needs to do their due diligence) for you actually to get the benefit of the tax saving.
On the longer-term options:
The longer term options are ones where you don't get the immediate benefit at the end of the tax year. You're not necessarily going to get tax back from the taxman, but they are still well worth looking into. I think many people are familiar with tax free savings account. What that entails is you can contribute a maximum of R36,000 at the moment per tax year – up to a lifetime maximum of R500,000 rent.
So if you stick to your knitting, it'll take you about 15 and a half years to reach your lifetime maximum. The upside of this investment is all the capital gain, all the interest income and the dividends are tax free. If you do what you're supposed to do – contribute R36,000 per year for the period – there's an incredible tax saving at the other end. You do the time, you take on the risk and you'll get rewarded in the end and it'll be tax free.
So what I like to say to my clients is, if investing in your retirement annuity is not appropriate for all sorts of reasons that we've spoken about, then put some of it into this tax free. But think about the tax free savings account as part of your retirement savings. Put it in that bucket in your head and leave it alone.
The other one is obviously tax harvesting. We all know that we all have to pay a capital gains tax if our investment has made a gain. So it's a bit ironic – you've now made a gain and you have to pay the tax. But every year, the first R40,000 of your capital gain is tax free. What you can do is rebalance your portfolios on an annual basis, to take advantage of that R40,000 that is tax free. Over time, that becomes a substantial tax savings. So we call that tax harvesting.
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