We’re taxed on everything – our income, things we buy, when we fill up with petrol, even when we die! Here are some ways to reduce the tax you owe – legally!
Proper tax planning is not something that you do only when submitting your tax return. To save on tax, you have to consider the tax consequences of every transaction or investment that you make. It is a continuing process and the help of a knowledgeable tax advisor is necessary if you want to save a lot of money.
Donating to public benefit organisations. You can donate up to 10% of your taxable income to public benefit organisations and claim a tax deduction on this donation provided these public benefit organisations comply with section 18A of the Income Tax Act.
Donations to children: Make use of the annual amount exempt from donations tax by donating to your children. Over years, this reduces your estate significantly and lessens your taxable income. The amount is currently R100000 per taxpayer where husband and wife uses this together to transfer wealth to their children. Donations between spouses are exempt.
Retirement annuity contributions. You’re currently able to contribute a maximum of 15% of your non-retirement funding income to a retirement annuity, all of which should be tax deductible. Non-retirement funding income is income not linked to a pension or provident fund, for example, rental income from property.
Medical aid contributions. Taxpayers under the age of 65 may deduct monthly contributions to medical schemes up to R270 each for the taxpayer and the first dependant on the medical scheme and R181 for each additional dependant. You can also claim a deduction for medical scheme contributions exceeding four times the amount of the medical scheme’s fees tax credits and any other medical expenses limited to the amount that exceeds 7.5% of taxable income. You will need to submit receipts when submitting your tax return.
Income splitting: If the husband earns a large salary and the wife earns effectively nothing, all investment income that goes to the husband is taxed, after some exemptions, at 40%. There are legitimate means of letting the wife earn all income by making her use her tax exempt threshold completely. Tax is payable, after using her own exemptions and rebates, at 18% and increases on a sliding scale.
Retirement funding: Making investment decisions with after tax income when you can achieve the same investment decision with before tax income makes little sense. Using your full retirement amount that is tax deductible every year makes a lot of sense when you start seeing the effect over a couple of years.
Capital gains tax exclusion: The annual amount of capital gains that is exempt per person per year is R30000. This is available to every taxpayer and people should use this even if it means buying and selling some shares to realise the gain. It starts costing you money when you sell all your shares after five years and make a R50000 gain. After the R30000 exclusion and with a 40% tax rate, you will end up paying R2740 (13.7%) tax that is completely unnecessary.
Sources
Personal interview with Sam Goudvis, Sam Goudvis & Associates, life and investment brokers. Pretoria.
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www.taxconsulting.co.za
www.thesait.org.za