Article by Satrix Investments

Are you being smart about your tax?

No one likes to pay tax, but in a functioning democracy it is a necessary evil.

There are however ways to reduce the amount of tax that you do pay and as we head towards year end (aka holiday time, also known as spend-all-your-money time) it is the perfect time to remember the strategies that could save you tax year round.

Note that all three scenarios discussed below pertain to a tax year which comes to a close at the end of February each year. So when we talk about a year, we are actually meaning 1 March to 28 February.

1) Very simply, your tax free savings account.

National Treasury set up this initiative in 2015 allowing every individual the opportunity to contribute a maximum of R33 000 per year (with a life time maximum of R500 000) to a tax free savings account. They want to encourage South Africans to save. The tax savings is in your returns where you will pay no capital gains tax, no income tax on interest earned and no dividend withholding tax either. This, in tax terms, is a free lunch if you commit to the stipulations and the time frames. All Satrix products (ETFs and Unit Trusts) are available as tax-free savings options and you can access them across all platforms.

2) Did you know that contributing to your retirement funmeans you pay less tax on a yearly basis?

As an individual, you are allowed to contribute 27,5% of your taxable income (to an annual maximum of R350 000) to your pension, provident or retirement annuity fund.

Let’s use an example to see how that actually works. You receive R15 000 income in total per month from your employer, some freelance work and rental income from a property. On a monthly basis, you contribute R1 000 to a pension fund and R400 to a retirement annuity.

Your taxable income before deductions: R15 000 x 12 = R180 000

Your retirement fund contributions: (R1 000 + R400) x 12 = R16 800

Your retirement fund contributions are 9.33% of your taxable income (R16 800/R 180 000)

Your taxable income will be reduced by R16 800 each year, so you will only pay tax on R 163 200 and not the full R 180 000

You are able to contribute a total of R49 500 per year (R180 000 x 27,5%) to your retirement funds and still see the tax minimising benefits.

3) Capital Gains Tax (CGT)

Whenever you sell an asset (whether it is a house* or an ETF investment) you trigger a capital gains tax event if the value of what you sold is higher than what you originally bought it for. You are obliged to pay tax on this capital so gained. There are however some exemptions which, if you use them smartly with your investments, can reduce the tax you pay.

Each year, the first R40 000 capital gain earned by an individual is tax free. Thereafter, 40% of the gain will be taxed at your marginal tax rate (this means that the most you will pay on a gain is 16,4%). So each year you have R40 000 worth of returns on which you will pay no tax. If you use this tax relief carefully in your financial planning you can end up saving tax. You may however require your financial adviser to work with you on this.

So if you dispose of an investment and you do incur a capital gain, it means that your investment has actually grown positively. The best thing to do is to ascertain the amount of CGT you will need to pay on this transaction and keep that separately (perhaps in a money market fund or your mortgage bond) so that you have it available after Feb of the following year when you need to file your personal income tax return.

* The first R2 million rand capital gain on disposal of a primary residence is excluded from CGT.


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