It’s a taxing issue, really

“Nothing is certain except Death and Taxes” is a famous quote by Benjamin Franklin. (Another famous Franklin proverb is “A penny saved is a penny earned” interestingly enough.) 

A popular topic we discuss with clients as advisors is tax. Either paying too much tax, how to reduce tax and generally assisting people to ensure the correct tax structures are in place.

Coming from a South African point of view, we feel that our tax monies are being used incorrectly and that we receive little to no benefit as citizens, especially since we need to privatise so many facets of our lives, such as healthcare, education, and, security, to name a few.

There are a few tax structures that investors can utilise, to ensure that tax implications are reduced.

There is a difference between tax avoidance and tax evasion, and understanding the difference is a smaller tax bill versus fines, and or legal implications.

As with anything in life, consulting with a professional (in this case a tax practitioner) is always highly recommended.

In this article, I will discuss some obvious tax reduction tips, and some lesser-known ones, apart from the usual topics that have been discussed many times.

De Minimis Threshold 

As per current legislation, SA citizens can withdraw the full value of their retirement annuities (RAs) and pension funds, if the full value of the said investment is below R247 500, at the age of retirement (55 years old). But what if you, or your spouse, do not have any retirement investments, or have never contributed to one either?

There are many factors that need to be considered, but if you have a taxable income, or are married in community of property, there is a way to reduce your taxable income, and not have it cost you a cent or fix any of your capital.

Investors can invest any amount below the de minimis threshold into a retirement vehicle (namely a RA, immediately withdraw the full value once invested, and then benefit from the tax rebate on the subsequent tax return(s).)

Bear in mind that the maximum annual deduction is 27.5% of your gross annual income, but any capped deductions will roll over. This method is only applicable to the above-mentioned scenario of having no prior retirement savings or contributions, but it’s an easy and effective way to reduce your taxable income, even for a potential number of years.

Bear in mind, the de minimis rule applies to your net retirement contributions, so it won’t be possible to use several different investments at the same time. Like every SA citizen, you have a lifetime tax-free amount of R500 000 in terms of retirement withdrawals. Every time you withdraw from the retirement investment, it will reduce your lifetime tax-free amount. It does not apply to everyone but can potentially apply to some.

Endowments

As a relatively new advisor (I currently have over a decade of experience), I have always thought of endowments as investment traps, based on the experience and discussions I have had with older clients, and the horrible legacy products from the infamous insurance companies such as Big Blue, Big Green, and …. the other Big Blue. The term polismousse is one that comes to mind with regard to the horrendous and unfavourable terms of old, but this is no longer the case. My opinion on endowments has changed extensively, especially with the changes in legislation, and newer generation endowments that can provide bespoke options for investors.

For the sake of simplicity, the main benefit of an endowment comes from its flat tax rate of 30% (tax payable on income and capital gains tax), as well as the estate planning benefits.

An endowment is really only beneficial for investors who have income tax rates higher than 30%, but the true benefit is for investors who fall in the higher end of the income tax spectrum. All taxes are levied within the investment, and no tax certificates are provided. From an admin point of view, it’s much simpler, and most endowments typically have a default, five-year restriction period.

Many offshore platforms also provide endowments, which allow investors to have exposure to direct offshore shares in foreign currency, and other fixed and guaranteed structures, but the main benefit is to avoid Situs tax from US share ownership, for example.

Endowments also do not levy any executors’ fees on the death of the contract owner, but estate duty is still payable. They do, however, offer very efficient vehicles in the transfer of ownership to nominated beneficiaries, especially if the assets are offshore.

Local endowments are also a good option, especially for investors who are more conservative and are dependent on interest from local cash. Paying income tax at 30% vs 45% makes a huge difference, especially if you compound the tax savings over five years. 

Sars tips and tricks 

RA contributions

Are you aware that you can claim your RA tax contribution upfront on a monthly basis? It’s a discussion that you need to have with your company’s HR or payroll supervisor, but you have the ability to claim your refund on a monthly basis. You will most likely receive a much smaller refund after your tax return is submitted, but at least you do not have to rely on Sars too much if a tax rebate is payable to you.

Tax directives

Is more than 50% of your gross income earned as commission? Then you are eligible for a tax directive. It’s a much more admin-intensive process that takes diligence and self-control, but essentially, it’s a way of being taxed at a much lower rate. Again, it’s not recommended and applicable for everyone, as it is very tempting to spend your capital, but it places the onus on you to (potentially) pay Sars after your tax submission, but at least you will not have to wait on them either, as per the example above.

As always, it is recommended to consult with a tax practitioner as well as a financial advisor, but as noted there are still definitely a few ways to reduce your tax bill.