Fund and games: financial tips for the end of the tax year
As the end of the tax year looms, we have some solid advice for getting your ducks in a row
Although we may still be reviewing the details of finance minister Tito Mboweni’s budget and what it means for our finances, it is important to remember that February 28 is the end of the tax year for individuals and trusts. This is the time to review your affairs to ensure they are optimally structured.
Top up your retirement fund
An amount equal to 27.5% of taxable income, limited to R350,000 per year, may be deducted from your income in respect of contributions towards retirement funds. (Retirement funds include provident, pension and retirement annuity funds.)
Contributions towards retirement funds are incredibly beneficial since they provide for retirement while saving tax at the same time. The tax deduction you receive depends on your marginal tax rate. For example, if your marginal tax rate is 45% and you contribute R100,000 to a retirement fund, your tax will reduce by R45,000. The deduction works on a “use it or lose it” basis. However, over-contributions can be carried forward to the following tax year. Tax-free savings accounts
These accounts offer tax-free investment returns on the money invested. This means you don’t pay tax on any of the interest, local dividends or capital gains you earn on your investment. Each individual has a R33,000 annual contribution limit that must be used before the end of the tax year. Beware, as contributions over the allowable amount will result in a penalty of 40% of the amount contributed above the limit.
The funds in the tax-free savings account can be accessed at any time, but the amount withdrawn cannot be replaced.
Use the annual donations tax exemption
Individual taxpayers may make donations up to R100,000 per annum free of donation tax. From an estate planning point of view, if you are using a trust, it makes sense to donate to your trust. This is beneficial as it reduces the size of your own estate while increasing the assets in trust. Assets that are owned by a trust are not subject to estate duty.
Annual capital gains tax exemption
Individual taxpayers are entitled to an annual exclusion of R40,000 on capital gains made during the tax year. Sometimes it may be necessary to rebalance your investment portfolio by selling or switching out of unit trust funds that may result in capital gains. If you have not used your annual exclusion, rebalancing your portfolio before the end of the tax year or rebalancing your portfolio over two tax years can result in tax savings.
Consider section 12J investments
After contributions to retirement funds, an investment into a section 12J venture capital company, approved by the SA Revenue Service (SARS), may significantly reduce tax liability. The full investment contribution is tax deductible if retained for a period of five years. Section 12J investments are higher risk, less liquid investments and are not suitable for everyone, but could appeal to taxpayers with a high marginal tax rate that have already contributed the maximum to their retirement fund.
Be careful with provisional tax
There are generally two provisional tax payments. The first is due six months before the end of the tax year and the second on the last day of the tax year.
For provisional taxpayers with a taxable income of less than R1m, the estimate must be equal to the lesser of the basic amount or 90% of the actual taxable income. For provisional taxpayers with a taxable income greater than R1m, the estimate must be equal to at least 80% of the actual taxable income.
To avoid penalties when you submit your second return, your estimate of taxable income must be within 90% of the actual taxable income (if less than R1m and you have used a lower estimate than the previously assessed amount when making your first payment). If you earn more than R1m a year, your estimate must be within 80% of taxable income.
It is worth noting that the rules applying to individuals with regard to their offshore investment allowances, namely the foreign investment allowance of R10m and single discretionary allowance of R1m, are based on the calendar year and not the tax year.
Tax planning should be an important component of your overall financial planning, but should never be the primary reason for making a particular investment. If you are unsure, consult a certified financial planner to make sure that your investments are tailored to your requirements.
• Morné Bezuidenhout is a director and investment planner at Netto Invest.