Eagerly anticipating the budget this year and forever the optimist, Finance Minister Pravin Gordhan started off well: R9.5bn of individual tax savings and revenue collection up by R10bn from the latest estimates. However, for the individual taxpayer, things went slightly downhill from there... Let’s unpack this a bit.
Not all Doom and Gloom
Ok, ok so maybe I have been too harsh as only certain individuals (the richer ones) will actually be subject to greater tax, the lower end income earners will benefit quite a bit from the new tax changes. Provided they aren’t selling expensive capital items or investing heavily in the stock market or interest bearing assets. Your average taxpayer in South Africa, earning under R160 000 (R150 000), will actually be saving R685 per year in taxes. The new lowest tax threshold of R63 556 (R59 750) sees quite a significant change (a 72.5% saving from before). Whether these measures will stimulate growth remain to be seen.
Medical tax credits, designed to make medical scheme contributions fairer, actually come in better than previously thought. A R230 and R154 credit for the first two, and thereafter more, dependents is higher than proposed originally. If you are a taxpayer earning R160 000 and you spend R12 000 per year on your medical aid, you previously only got a tax saving of R1 552 per year, where as now you will receive a saving of R2 760 per year. A winning situation there.
What I find most exciting however is the introduction of the Tax Ombudsman, finally SARS has admitted it cannot handle all the problems affecting taxpayers - especially for those taxpayers who can’t afford expensive consultants. Let us hope this really works.
Individual Tax Relief
The figure of R9.5bn for individual tax savings may look grand, but unfortunately only benefits those taxpayers who didn't receive a salary increase for 2012. Individual taxpayers are taxed on a tiered tax rate in South Africa, so the more money you earn, the more tax you pay. Each year the budget allows for tax savings, taking into account inflation (the decrease in buying power for every Rand spent). However most people experience inflation way above the official rate of 6.2%, and this kind offering by the minister doesn’t really go far enough to help the taxpayer. In fact if you look closer, the real savings actually add up closer to R4.3bn. One has to love accountants.
The much anticipated replacement for Secondary Tax on Companies of 10% comes in at a whopper of 15%. Effective 1 April 2012, the 10% we anticipated is no longer valid, meaning that before you ever see the dividend you earned from owning shares, 15% will be kept back and given over to SARS. So effectively, you are being taxed for investing money in our share market. Ok fair enough, you are getting richer for growing your money, but isn’t this just a way of taxing the super rich without actually saying so? How does this encourage individuals to save, if on top of our already high individual rates of tax another 15% is chopped off? Our tip – invest in a pension fund, they are exempt from dividends tax, so no double tax, and your contribution can be claimed as a deduction.
Capital Gains Tax
The biggest shocker (but maybe it shouldn’t have been) was the increase in the capital gains tax rates which now stands at a maximum of 13,3% for individuals (up from 10%). We are lucky in South Africa that capital gains are only included at a certain rate, but in an economy where investment and growth are paramount, should the investor be taxed even more? Again this has all the signs of a wealth tax without calling it such. I shouldn’t be too critical though as there is some relief against these increased rates: If you sell your home then the first R2m (up from R1.5m) gain made won’t be taxable. Also the first R30 000 (up from R20 000) of any normal gain won’t be taxable either, but that’s about where it stops. You would have to die before taking advantage of any further capital gains tax breaks.
South Africans are forever being chastised for not saving enough, yet government does not provide the opportunity for us to do so. Dividends are now being taxed, and the tax benefits on interest - the other form of return on savings - have ground to a complete halt. A very small amount of annual interest is usually exempt from being taxed, this amount usually increases for inflationary pressures year on year, but in 2012 this isn’t the case. R22 800 seems to be the limit for those of us under 65 years of age. If you are over 65 years of age then a whopping R33 000 exemption will come your way. Why the freeze on the exemption? Possibly the introduction of an all-round savings initiative in 2014, but we await the discussion paper on that one. Otherwise your guess is as good as mine. Don't worry, there is some good news. Although I’m still struggling to understand how it will work, foreign dividends will be taxed at a maximum of 15% instead of a possible 40%. So investing offshore may yield greater returns now. Note: this applies to offshore holdings of less than 10%.
There is a whole series of tax reforms due in the 2014 year of assessment to look forward to, let's hope that this makes up for some of the items left out of this year’s budget.
In general, the other proposals in the 2012/2013 budget affecting other types of taxpayers seem to encourage some form of growth and investment by companies into the economy. One can only hope that the private sector comes to the party.
Perhaps the best part of the new budget is the increased tax advantages for small businesses and the decrease in paperwork required for submission. Small business is the foundation of a strong economy, most of you out there want to own and run your own businesses and make this country come alive! According to SARS, 18 000 tax advisers have outstanding returns and owe R240m in taxes. Coupled with the 700 000 taxpayers who failed to submit a return for 2011, we suggest using a trusted adviser and submitting on time. Avoid penalties and bad advice, use www.taxtim.com.
What is the medical deduction limitations for over 65 for the tax year 2013
TaxTimsays: 28 February 2012 at 13:49
Thank you for your question. There have been no changes to the medical deductions for those over 65 years of age. Expenditure will be allowed as a deduction, the same as before. There will be a new scheme from 2014, but that will be to the benefit of taxpayers over 65 years of age and allow even more of a deduction.
I hope this answers your question?
asciisays: 11 March 2012 at 20:13
Excellent article, thanks for sharing!
TaxTimsays: 11 March 2012 at 20:17
Thank you very much, comments like these are always appreciated!
Gitika Summerssays: 19 March 2012 at 11:19
Hi, I am interested in knowing how to save money without being taxed on it. Any advice? I do not have a pension fund and have not had one for a while. I would still like to save money for retirement but do not know how to do that without giving a chunk of it to the government. Please help! Thanks.
Eugenesays: 20 March 2012 at 15:51
Hmm, a R1500 increase and R2000 more taxes!!! Why do we even get increases?!
TaxTimsays: 20 March 2012 at 16:41
I have to ask how that happened? Generally it should not work that way at all.
TaxTimsays: 20 March 2012 at 16:45
The best routes to take would be to invest in an Equity Fund such as Allan Gray, Coronation, Liberty etc as the returns from those are in the forms of dividends and interest. These returns are taxed, but at a much lower rate in some cases and there is room for growth as well. Alternatively putting your money in a money market gets you a stable return on your investment. If you invest in a Retirement Annuity Fund then you can claim a tax deduction each year and at the age of 55 you will get a lump sum payout and an annuity for life. There will be some tax on this however.
Unfortunately for you TaxTim is not a financial planner and the law doesn't allow me to give full on planning advice. If you email me via the helpdesk I will put you in touch with some names of advisers to consult with if you would like.
Hawa Bebe Sattarsays: 2 May 2012 at 11:28
Hi Tim, The 50% proposed nominal tax on mining companies. How did this decision arise? What is the purpose and where will it flow to and who gets the royalties? Thanks Bebe
TaxTimsays: 6 May 2012 at 13:01
As far as I am aware the decision came from the much discussed mining charter and the need for greater tax revenue. The government would be the recipient of these funds, as for what they do with them I cannot answer. In theory it should go to public works programs and social up-liftment, but we wait and see.
chucksays: 16 May 2012 at 15:18
what do you think the inflation rate will be for 2013
TaxTimsays: 17 May 2012 at 17:01
Well speaking as a tax professional and not an economist it would be difficult for me to speculate, but I’d go so far as to say that we’re probably looking at an inflation rate of between 5-7% that’s of course if there aren’t any massive global catastrophes.
gjdsays: 30 May 2012 at 12:49
Hi Tim - Being a contract worker what options do I have to reduce tax deductions? At the moment Iam on a 6 month contract but cant be assured of continued work. Pls help.
TaxTimsays: 4 June 2012 at 11:32
Thanks for the question.
In general a contracted working taxpayer can deduct any expenses that are made in earning that income. These are only business expenses, so remember to separate those from personal expenses. Keep a separate record and when you do your tax return enter these expenses and this will reduce the tax you have to pay.
Please continue asking away if you have any other queries.
Meisha Mullasays: 16 June 2012 at 22:58
Thank you for a very informative blog.
I am a network marketer. I'm just beginning to earn a monthly residual income, it's still under R500 a month. I have not looked into the tax part of things yet. Even my earnings still go into my personal account. What should I do going forward? Do I need the services of a general accountant or someone who specialises in taxes? Some direction would be much appreciated.
Thanks in advance.
TaxTimsays: 18 June 2012 at 16:30
Thank you for the compliments and keep reading!
What do you mean by monthly residual income? As in disposable income after expenses? Is this income separate from your main income?
If this is a side business which is separate to your normal income then any expenses you incur which leads you to earn this income can be deducted against the income earned. Remember only those directly related. I suggest keeping a spreadsheet of all this income and expenses. For now getting an accountant would be costly given what you earn, would you like some direct contact though. Tim can email you directly to discuss further if you are speaking about a full ob business?
tertiussays: 3 July 2012 at 22:18
my employer deducts 25 percent of my salary automaticaly each month as tax. My total income from 1 march 2011-29 feb 2012 was R55 400, can i claim the total of R13 850 that was deducted through the year as a rebate, because i fall under the threshold?
TaxTimsays: 4 July 2012 at 9:16
Thank you for the question!
Did you work the whole 12 months of the year and are a fully salaried employee? Your salary fell below the taxable threshold of R59 748 for the 2012 tax year and usually NO amount of PAYE should have been deducted, only a small amount for UIF. When you submit your return you should be entitled to this amount as a full refund.
Reinhardtsays: 16 July 2012 at 14:17
I'm a bit clueless on these tax matters. I was just wondering what is the min amount I need to earn to register as a taxpayer or do I need to register regardless of what I earn.
TaxTimsays: 16 July 2012 at 16:13
Thanks very much for the question! I think a lot of South Africans are feeling this way at the moment. For a brief explanation on exactly how tax is calculated, I wrote a blog you may find useful.
For the 2013 tax year, that runs 1 March 2012 - 28 February 2013 you need to earn more than R63 556 to qualify to pay tax. However even if you earn less than this your employer may still submit your details to SARS so it would be worth registering anyway. My advice is to register regardless. That way you are always compliant and ready for when you do need to start paying tax.
If you go to www.taxtim.com we guide you through the registration process as well and provide the relevant documentation so you can register and become tax compliant.
I hope this helps, if you have any further questions you can always email me on the helpdesk.
Melodysays: 30 July 2012 at 11:39
Quick question. If I make 83000 in a year. Will only the part above the threshold be taxed at 18%, or the whole amount?
TaxTimsays: 30 July 2012 at 12:51
You are correct, so the difference between R83 000 and R63 556 and therefore will only pay tax on R19 444 which will be R3 499.20. Try our TaxTim salary calculator to see how much after tax income you get into your account each month.
Marcsays: 12 August 2012 at 20:27
Please can you advise if I'm supposed to be paying tax on interest earned from a fixed deposit investment or a general savings account? Say, I invest R100 000 in a fixed deposit at 8% interest per annum, will I have to pay tax on the R8 000 interest I earn per year? I see you mentioned that there seems to be an exemption for interest earned of R22 800 but not sure if this is confirmed?
TaxTimsays: 12 August 2012 at 21:44
Any interest earned from a bank account/fixed deposit or investment which exceeds R22 800 per year will be subject to tax, provided you are under the age of 65. So effectively at an interest rate of 8% you would need to have invested at least R285 000 before you would start paying tax on interest earned.
I hope this helps? Please keep the questions coming!
Keithsays: 23 August 2012 at 1:04
Hi Tim, I,m a bit confused here or it's the lateness of the hour! On 30/07/2012 you reply to Melody that she would pay tax on the difference between her income & the tax threshold. Therefore by the same logic if I am +65 my threshold is R99 056 & I am self employed & I make R145 000 in a tax year I only pay on the difference? ie R45 944 x 18% = R8 269 Which begs the question, what about the rebate R17 830 ---- SARS will be paying me! What have I missed? Thanks for a great BLOG Keith
TaxTimsays: 23 August 2012 at 9:18
Thanks for the compliments on the blogs and I'm glad you are enjoying them!
Is that the amount calculated on your ITA34 from SARS after you have submitted your ITR12 tax return?
As a self-employed income earner you are most likely deducting all business related expenses which brings your taxable income down to the R145 000. On your provisional tax return you may not have taken these expenses into account and would have paid provisional tax on the total income earned. IF that was the case then when, at year end, you include the deductions this would adjust the actual tax payable right down, thus the large refund. That amount as a refund is very high given your taxable income though. I'd be very interested to see your tax calculator or perhaps the ITA34 if you'd like to send it to our helpdesk for me to have a look? How did you complete your provisional tax returns?
Christosays: 26 September 2012 at 17:26
My question: Say I have an investment of R10 million in a Money Market account at a bank earning interest of 4.5%. What tax rate applies to the interest earned on this investment? Does the tax rate increase on bigger investments ie R100 million or more?
TaxTimsays: 27 September 2012 at 8:13
Thank you for the question!
Tax on interest earned from a local source would be taxed at your marginal rate of tax. The first R22 800 is tax free however, so any interest above that is taxed in your hands. R10m at 4.5% attracting R450 000 per year, assuming there is no other income earned for that year would amount to R92 000. Investments of R100m would attract tax at 40% of the interest earned. Interest is taxed as per the normal income tables except for the first R22 800.
jimsays: 16 October 2012 at 15:21
Hi Tim Think you missed Keith's point He calculated his tax as 18% over threshold then still wanted to take off the rebate The rebate of R 17830 is the threshold R 99056 * 18% (same thing) so Keith wants it twice
TaxTimsays: 17 October 2012 at 0:51
Thanks for pointing that out. Quite rightly the only tax paid is the difference between the amount of taxable income and the tax threshold multiplied by the relevant percentage. This is exactly the same as taking the total Taxable Income and multiplying it by the tax percentage and then subtracting the primary rebate.