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Manage your taxes better over the next decade, we pay enough already

Death and taxes. It is the perennial cliché and a certainty in life, things that you cannot get away from, but they can be managed.

We all do certain things to manage these “inevitabilities.” Many of us will not be in a position to renew our body parts or live in android bodies to achieve immortality, so we do what we can by being more health- conscious or by looking after ourselves better in some or other way. We eat healthier, do yoga, park runs and/or some other form of exercise, meditate, or whatever is deemed necessary to improve our quality of life to “delay” the inevitable and enjoy the time that we have.Taxes can be managed as well. South African tax payable today can be described as direct or indirect in my opinion, for the purposes of this discussion, we assume that direct taxes is anything you are paying directly out of your pocket. VAT, income tax, estate duty, capital gains taxes. But I also believe that in a current “failed state” society (this is the best description of the management of our country over the last couple of years) we pay a whole lot of indirect taxes which should ordinarily be covered by government, but the monies are being spent/squandered in some or other way, consider the following as examples:

  • High insurance premiums paid for driving on unsafe roads, be it as a result crime, lack of maintenance or users of these roads not obeying the rule of law.
  • Above inflation increases in basic utilities such as water and electricity.
  • School and varsity fees, you need to pay due to public systems not being of the required quality.
  • Medical aid/some other form of medical insurance due to the public healthcare not being adequate.
  • Owning and maintaining cars due to the lack of a functioning public transport system.

The net effect is that South African’s real or effective tax rates are actually much higher than the marginal income tax rates as per the below SARS income tax table applicable to individuals in the 2019/2020 year of assessment.

The above is currently saying that the maximum marginal tax rate is 45%, companies and trusts aside, from an individual perspective, taxes need to be managed. By making use of the exemptions and allowances available to individuals in any given tax year, one can actually reduce your taxable income by significant amounts. This is an efficient way of reducing your “effective” tax rate you are actually paying, after all, we shouldn’t be paying any more than we need to fund Nkandla or lavish politically connected weddings. The main vehicles available to individuals to get these effective tax rates down, can be listed below:

  1. Retirement/pension/provident fund contributions
  2. Interest exemption
  3. Other qualifying medical expenditure
  4. Tax-free savings accounts

1. Retirement/pension/provident fund contributions

Listed as the first and probably the most important in getting our effective tax rates down, government encourages us to save as much for retirement as possible, and depending on how much you earn in any given year of assessment, you can deduct up to R350 000 per annum. This is significant.

The contributions to pension, provident and retirement annuity funds are deductible but limited to 27,5% of the greater of remuneration or taxable income. This equates to approximately R1 2730 000 in taxable income/remuneration in any given year of assessment you need to earn to qualify for the maximum allowable contribution.

Assuming that most of us are not lucky enough to earn these amounts in a tax ear, the beauty is that any excess may be carried forward as deductions to subsequent tax years until your “over contributions” have been depleted. There are other rules as well that allow you to take previously disallowed contributions as an add-on to the tax-free amount (currently R500 000) when you retire, or not have these disallowed contributions carry any income tax when you start living off your savings in the form of annuity payments.

The point is that even if you over-contribute, this benefit will never be lost so it is always worthwhile saving as much as you can to these vehicles from a tax perspective. It might be worthwhile to consider opening additional RAs if the combination of your and your employer’s contributions are less than the above limits.

Using these exemptions effectively could save you as much as R140 000 per annum (per individual) in tax if you are currently paying 40% effective tax for example. This is money that can be saved or used to pay off a mortgage or other debt, an immediate benefit which cannot be ignored.

2. Interest exemption

Natural persons are exempted from interest earned on invested funds as follows:

With a bit of reverse engineering, always make sure that you have the following in amounts in reserve or “rainy day” funds earning interest (assuming 7% interest earned on fixed deposits) in order to maximise the interest exemptions:

  • Persons under 65 years: R340 000
  • Persons over 65 years: R492 857

It is always good to “tap-out” the annual interest exemptions using the above, again this is available per individual and spouses can double up on the saving. It is also prudent to have liquid cash available for the unforeseen, so the reasons for having this investment should complement the tax incentive nicely.

3. Other qualifying medical expenditure

The medical aid tax credit is relatively small compared to what our medical aids, medication and doctor’s visits are costing us annually. The exemption for medical aid contributions is a mere R310 per month for the main member and the first dependent and R209 per month for all remaining dependents.

If we do keep record of all medical expenses not covered by our medical aids/hospital plans such as payments to medical practitioners, nursing homes and hospitals; payments to pharmacists for prescribed medicines and payments related to physical disabilities and impairments, these can be used in the additional medical expenses tax formulae to reduce taxable income and further decrease our effective tax rates.

4. Tax-free savings accounts

Even though this does not form part of your taxable income calculation, but taxpayers can still contribute up to R33 000 per annum (R2750 per month). No subsequent dividend withholding taxes, income taxes or CGT is payable on these investments.

The contributions are limited to R500 000 over a lifetime. If you maximise the benefit annually, it will take you just over 15 years to reach the lifetime limit. At 12% growth per annum, the investment should be worth approximately R1.4 million in 15 years’ time or R580 000 in today’s money terms (assuming 6% average inflation).

This should be done in all family member’s names to maximise the benefit

Using these techniques requires discipline and budgeting. These are short-term sacrifices for relatively larger future gains. By combining these techniques and being cognisant of the exemptions and deductions made available to us, we can reduce our effective tax rates to as much as little as 20%, this is significantly less than the maximum marginal tax rate of 45% above.

Remember that the tax year ends 28 February every year so if you haven’t used some/all of the above you might have a little bit of work to do if you want to capitalise on the 2019/2020 benefits available to you.

So the next time you have to forego the current luxury/expense to rather save and make use of the above exemptions and techniques, think of it as “getting your own back” for the indirect taxes you pay every day for living in South Africa today. You might find it makes things a little be it easier.

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Martin Strauss


Martin joined Sharenet Wealth in June 2018 to lead our Investment Strategy Group. Prior to this, Martin was a Portfolio Manager at Standard Bank Stock Broking heading up offshore investment strategy. He was previously Head of Trading at PSG Wealth and has more than 7 years' experience in the investment management industry. Martin holds a B.Com Honours degree in Accounting, is a qualified Chartered Financial Analyst, holds the CFP designation and is a member of the Investment Analyst Society of SA. Martin is a director of the Sharenet Johannesburg branch.