Every year we focus our January Financial View on the same topic – tax allowances season. The individual tax year ends each February and most of the allowances are linked to this period, operating on a “use-it or lose-it” basis with no rollover into the next tax year. We have tended to focus on how to use the tax allowances to reduce your tax liability but this year we have thought we would look at it from the perspective of why these tax allowances exist.
Why does the Government want you to save?
We have seen a lot of sensational reports and reasons why the Government needs you to save. A lot of these stories revolve around the Government needing to access your money to prop up some of their failed entities but nothing could be further than the truth. The reason the Government wants you to save is so that you don’t become a burden on the state – placing even more pressure on a damaged fiscus.
Consider the amount of the Old Age Grant of R1 860 per month. It is an amount far lower than the minimum wage in the country (+- R 3 300 per month). And it is certainly an amount significantly lower than what would be a liveable wage. Yet the R1 860 per month is the amount that each person receives for the Older Persons Grant which is available for every South African, over the age of 60 who meets financial criteria of having income and assets below the limits. Essentially if you don’t have much the Government will pay you an amount each month to help you out – as a social grant.
Do you think you could survive on R1 860 per month?
R1 860 may not be a lot but there are at last count 3 6767 791 South Africans receiving this on a monthly basis. This means that every year the government needs to find R83.5bn (yes billion Rand) to cover the cost of this grant. The Older Persons grant accounts for 44% of all social grants paid out within South Africa and is expected to rise due to the natural growth of the population. Data obtained from SASSA shows that this expenditure has increased by a whopping 293% over the past 13 years.
The total amount spent on social grants is just short of R190bn. There is no way that the Government can afford this expense to increase dramatically. By encouraging people to save they hope to slow the growth in the total expense for social grants. This is definitely going to become an issue with the twinned trajectories of increasing population and increasing unemployment. Already we have a small percentage of the population paying taxes to financially support the majority of the population.
We already know that we don’t get much back for the taxes we pay. The tax we pay goes to the fiscus to cover their expenditure including the social grants. So, if we don’t get rewarded for the taxes we pay, would it not make sense to try reduce our tax bill where possible? Certainly, we at Magwitch are big believers of taking advantage of all tax breaks that are available. We would rather have the money in an account in our name due to having utilised the tax allowances than the money sitting in a Government bank account where they have to decide whether to send the money to a failed state-owned entity, to pay salaries to civil servants or to pay out more social grants.
With all that said, here is a reminder of the tax allowances that we encourage you to utilise. The current tax year ends in February 2021, which means that you have just 1 month left to take advantage of your current annual tax allowances.
Retirement Savings remain your most tax efficient method to save. In order to encourage more taxpayers to save for retirement, the Government has created tax legislation that has many benefits for retirement savers. In fact, those saving for retirement enjoy numerous tax benefits.
Contributions to retirement savings are tax deductible – the more you contribute the more you reduce your taxable income. The tax deduction for contributions to pension, provident and /or retirement annuity funds is currently 27.5% of your taxable income (excluding any lump sum benefits or severance benefits) but before the donations deduction, with an over-all annual limit of R 350 000 per tax year.
We tend to see that the clients who have built up a nice sum of money have done so through diligent contributions to their retirement savings over a long period. This makes logical sense as you seem to get little back on the taxes you pay, the less tax you are able to pay will mean more wealth in the form of retirement savings for yourself.
Tax Free Savings Accounts
Tax Free Savings Accounts have now been in existence for the past six years and we still see good flows into this product. In our opinion Tax Free Savings Accounts rank second, just below your retirement savings in terms of priority of investment. This is because your contributions to your retirement savings investments are tax deductible whilst those contributions to a Tax-Free Savings Accounts are not deductible for tax purposes.
You do however benefit in that any income earned on your Tax-Free Savings Account is not subject to tax. The Tax-Free Savings Account is ideal for anyone that is already making ample contributions towards their retirement. They are preferable to all other investments (besides retirement savings) as the tax saved avoids erosion of the investment. Whatever you save in tax will result in your additional growth in your investment.
Current annual contribution limits for a Tax-Free Savings Account is R36 000 per year.
You work hard to accumulate income and grow your wealth. Through the correct application of financial products, you are encouraged to save and it is possible to protect this wealth from tax erosion. Both the Retirement Saving and Tax-Free Savings Account are easy to implement and it is still possible to open accounts and utilise your tax allowances for the 2021 tax year. Please contact Magwitch if you are interested in reducing your tax burden. Remember that you don’t always get the benefit on the taxes you pay and probably more importantly you cannot afford to live off what the Government can afford to pay you. Ultimately it is in your own hands.