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10 Tips to Pay Less Tax
Posted 22 April 2020 under
These tips are part of TaxTim's personalised recommendation tool called the Tax Health Score. Once you file your tax return with TaxTim, we analyze it and produce your own unique Tax Health Score which recommends how you can optimize deductions, pay less tax and maximize your potential refund in the future.
The tips below cover all possible recommendations and may not be applicable to your individual tax situation. The only way to know which ones apply to you is to use TaxTim to complete and submit your tax return.
1. Contribute towards a retirement fund
Your contributions towards retirement funds are tax deductible up to a limit of 27,5% of the greater of your taxable income or remuneration (to a maximum of R350,000 per year). This limit applies to the total contributions you make to any pension, provident or retirement annuity (RA) fund during the year. The tax deduction will always be limited to the actual contributions you made.
Your pension and provident fund contributions are usually structured via your employer (you will see these on your monthly payslip), but you can top-up your retirement savings yourself by contributing to a RA fund. Because you may not access your RA funds until you are 55 years old, this is a great way to save for your future, while also reducing your annual tax bill.
2. Open up a Tax Free Savings Account
This is a type of savings account offered by financial institutions that invests your money in a combination of financial products such as unit trusts, bank savings accounts, fixed deposits, bonds, etc.
The difference between this and other savings or investment accounts is that all returns, i.e. the interest, dividends and capital gains earned, will be tax-free in your hands. This means that you’re not liable to pay tax on the growth of your investment, nor if you decide to withdraw from your account.
Annual and lifetime contribution amounts There’s an annual contribution limit of R33,000 per tax year, as well as a lifetime limit of R500,000. Once you have reached your lifetime contribution limit of R500,000 no further investment in tax free savings account will be allowed.
No limit of number of accounts The annual limitation can be spread across as many savings accounts as you wish, provided you don’t invest more than R33,000 in total for the tax year (1 March to end February). So if, for example, you’ve already contributed R10,000 to one tax free savings account for the period, you’ll only be able to invest a maximum of R23,000 to any others.
No carry over of annual contribution limit The annual limitation can’t be carried over to the next tax year, you simply forfeit any unused amount and are given a new annual limit of R33,000 to invest in a tax free savings account. For example, if you’ve invested R27,000 for the tax year, you can’t carry the R6,000 over to the next year.
Contribution to a tax-free savings account for a minor As a parent, you’re able to open a tax-free savings account for your minor child(ren), but you need to be aware that any contributions you make to this account on their behalf counts towards their annual and lifetime contribution limit.
Benefits of a Tax Free Savings Account
Tax free growth, even if you reinvest The critical advantage of a tax free savings account is that your growth or earnings on the initial investment are exempt from tax on withdrawal. You’re able to reinvest (or capitalise) your returns and they don’t count towards your annual or lifetime contribution limit.
For example: If you invest R33,000 for the year and receive a return of investment of R5,000 that you re-invest, the total amount in the account will be R38,000, yet you’ll still be able to invest your full R33,000 the following year as the R5,000 reinvestment doesn’t count towards the annual or lifetime limit.
Unlimited withdrawals, with conditions You’re free to withdraw from your tax savings account at any time you wish, however any replacement investment amount is treated as a new contribution and will therefore count towards your annual and lifetime limits.
3. Donate to a SARS registered charity
A Public Benefit Organisation (PBO) is non-profit organization, which has special approval by SARS to not pay any tax in South Africa on the donations it receives. The organisation is most likely involved with charitable work e.g. healthcare, education, poverty alleviation, housing, conservation, environmental, cultural and religious services.
Your contributions to registered PBO’s are tax deductible up to a limit of 10% of your taxable income. Any donations exceeding this limit are carried forward and can be claimed as a deduction in the following tax year. To claim the tax deduction in your ITR12, you must ensure you obtain a s18A tax certificate from the PBO.
You can find a list of SARS approved PBOs on the SARS website here.
This is a great way to donate to a good cause, while also reducing your tax bill.
4. Join a Medical Aid Scheme
If you contribute to a Medical Aid this tax year (i.e. 2018/2019) you will receive a fixed monthly tax credit of R310 for you as the primary member, a further R310 for your first dependent and R209 for each of your additional dependents. SARS calls this rebate the Medical Schemes Fees Tax Credit - it is a flat rate per month (i.e. doesn’t take your taxable income into consideration) and is direct reduction of your tax liability.
For example: If John pays for medical aid for himself, his wife and his 3 children, his tax credit for the 2019 tax year will be calculated as follows:
R310 for John + R310 for John's wife + (R209 x 3) for his 3 children = R1,247 tax credit per month John's tax liability is therefore decreased by R1,247 per month (R14,964 per year).
If your medical tax credit is greater than your actual tax liability, then your tax liability will be nil and you will not receive a tax refund. This means that in the example above, if John’s actual tax liability for the year was R13,000, it will be reduced by the tax credit of R14,964 to arrive at a nil amount due to SARS. He will NOT receive the difference of R1,964 as a tax refund.
5. Keep a logbook if you receive a travel allowance
A travel allowance is a taxable fringe benefit, which means it will be included in your taxable income and you will be taxed on it. In most cases, 80% of the travel allowance is included for tax purposes (the assumption is that you drive 80% for personal and 20% for business). If however, you keep a logbook to record your business mileage, you can claim a travel deduction against it which could reduce your tax owed to SARS. Please note you can only claim a travel deduction if your travel allowance appears next to source code 3701 or 3702 on your IRP5.
Please make use of our Travel Deduction Calculator to see the amount of the travel deduction you can claim.
The use of an employer provided car, is a taxable fringe benefit, which means it will be included in your taxable income and you will be taxed on it. If however, you keep a logbook to record your business mileage, you can claim a travel deduction which could reduce your tax owed to SARS. Please note you can only claim a travel deduction if your company car fringe benefit appears next to source code 3802 or 3816 on your IRP5.
7. Claim commission related expense if you are a commission earner
If you are a commission earner, you will have commission income coded to source code 3606 on your IRP5. If your commission income (i.e. income next to source code 3606) makes up more than 50% of your total remuneration (i.e. income next to source code 3699) then SARS will allow you to deduct all your commission related expenses against your commission income. These are all expenses you incurred in order to earn your commission. Examples of such expenditure are telephone, stationery, employees’ costs, etc. We suggest you keep a record of these expenses, together with the related invoices, so that you can take advantage of this deduction in order to pay less tax.
8. Claim business travel if you are a commission earner
If you are a commission earner, you will have commission income coded to source code 3606 on your IRP5. If your commission income (i.e. income next to source code 3606) makes up more than 50% of your total remuneration (i.e. income next to source code 3699) then SARS will allow you to deduct all your business-related travel against your commission income. SARS will only allow you to claim this travel deduction, if you keep a logbook to record all of your business travel.
9. Claim your daily costs if you receive a subsistence allowance
If you travel for work and your employer pays you a taxable subsistence allowance which is coded to source code 3704 for local travel and / or 3715 for foreign trips on your IRP5, you’re able to claim against the allowance for your expenses – provided you have receipts for them.
You can claim either your actual daily costs (meals and incidentals) or the SARS approved deemed daily rate. Incidental costs include beverages, private phone calls, tips and room service.
What is the SARS deemed daily rate?
SARS has a set deemed rate for meals and incidental costs for local travel, applicable per night the employee spends away from home. They also have a fixed daily amount for business travel outside of South Africa, which varies from country to country. The rates are updated annually and available on the SARS website.
The 2018/2019 tax year daily rates are:
Local: Meals and incidental costs – R416 Incidental costs only - R128
International: Daily amount varies per country. Some popular foreign destination rates are: United Kingdom - GBP102 United States of America - US$155 United Arab Emirates - AED699 People’s Republic of China - US$127 For any other countries, refer to subsistence allowance for foreign travel.
This means that if you receive an allowance for these costs you’re able to deduct either: • the amount actually spent (limited to what you have received), or • the applicable deemed rate set by SARS • If you choose the deemed rate, you don’t need to produce proof of what you have spent. Actual costs, on the other hand, will need to be supported with receipts to qualify as a deduction.
The deemed rate is also called the tax-free rate because if you receive an allowance equal to the deemed rate, you can deduct the deemed rate and the net allowance will be zero and therefore tax-free.
It’s important to note that a loss can’t be created. In other words, if you receive an allowance amount less than the SARS deemed rate, the deduction you claim will be limited to the actual allowance you’ve received.
So that covers your meals and incidental costs, but did you notice that SARS doesn’t have a deemed rate for accommodation? If you receive a subsistence allowance intended to cover accommodation, you’ll need to produce proof that the amount (or portion thereof) was indeed spent on a place to ‘lay your head’ in order to claim the cost against the allowance and reduce the tax payable.
10. Claim expenses if you earn non-salary income
If you are self-employed (i.e an independent contractor, freelancer or sole proprietor) SARS will allow you to deduct all your business related expenses against your business income. These are all expenses you incurred in order to earn your income. Examples of such expenditure are telephone, stationery, employees’ costs, etc. We suggest you keep a record of these expenses, together with the related invoices, so that you can take advantage of this deduction in order to pay less tax.