TAX SEASON FEB 2024 – MAXIMISING YOUR TAX BENEFITS
Every year when writing our January Financial View we focus on the same topic – tax allowances. Whilst it may appear that we are repeating the same point, there is a good reason for this. The South African tax year end for individual taxpayers is the end of February each year. Our tax system grants individuals a number of annual tax allowances however the unused component is forfeited and not rolled over into the next year. To borrow a phrase from the rugby rulebook – “use it or lose it”.
The tax allowances are designed to allow you to reduce your annual tax burden. Many South Africans complain about the amount of tax that they are paying but don’t take advantage of the available tools to reduce their tax liability. With the South African economy showing no growth at present and the government continually needing more funding to bail out failed stated-owned-enterprises there is a always a great possibility of further tax hikes. This makes it very important to be aware of and, where possible, to take advantage of any and all tax allowances. We often ask the question just how much you currently get back for the taxes you pay – generally we have to pay for many private services in policing, healthcare and schooling because the government’s budget does not stretch very far. Especially if you consider the large amounts that they pay for salaries, grants and interest on their borrowings.
The tax year end of February means that you have just one month to take advantage of the current year’s annual tax allowances. In this month’s Financial View we relook at the two most important products an individual can use to reduce their tax liability.
Retirement Annuities
Retirement Savings remain your most tax efficient method to save. To encourage 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.
Tax deductibility of contributions
Contributions to retirement savings are deductible from taxable income up to certain limits. The current legislation allows for a deduction of up to 27.5% from taxable income, subject to an overall annual limit of R350 000 p.a. Due to the benefit of the deduction of these contributions, we often refer to the fact that SARS is “helping” you pay for your retirement. Ninety-One Asset Management use the phrase “gift from me to me” to describe the effect of getting SARS to assist in contributing to your retirement savings.
To demonstrate the benefit of this deduction, we use the following example. Mr Spender and Mrs Saver both do the same job and earn the same amount of R40 000 a month. Mr Spender has a short-term mind set and has no focus on retirement. Mrs Saver has a different philosophy and puts 15% away (or R6 000 a month). Both earn R480 000 a year, but Mrs Saver only pays tax on R408 000 whereas Mr Spender pays tax on the full R480 000. He will pay R22 320 more tax than her because of the higher taxable income.
No tax payable on growth in Retirement Fund
There is no tax payable within retirement fund on the investment returns. There is no income tax, capital gains tax and no dividend withholding tax levied against returns generated within the product. This allows the investor to invest in a lower risk portfolio whilst still generating returns similar to a portfolio that has a higher allocation to equities.
This creates the second tax relief that the investor gets to enjoy.
Tax allowances on withdrawal
The two previous tax reliefs are part of a deferred taxation structure. You don’t pay tax at contribution or growth stage, but you are taxed when you eventually withdraw from the fund. Fortunately, there is a further tax relief at withdrawal stage.
On retirement, the investor can withdraw a lump sum from the Retirement Annuity Fund of up to a maximum of one-third of the value of the Retirement Annuity. The first R550 000 of this lump sum is taxed at 0%, the next R220 000 at 18% and the next R385 000 at 27%. This creates the scenario where an individual can withdraw R1 155 000 at an average tax rate of 12%.
The remaining value (minimum two-thirds) must be used to purchase a monthly annuity or pension. This monthly annuity can be either a living annuity or a life annuity. Tax is payable only on the annuity received, calculated using the tax tables for individuals. Through good financial planning one is able to prudently manage your taxable income by adjusting the amount withdrawn each year, minimising the tax paid over the entire life of the investment. Tax allowances are increased for those individuals over 65 and the tax allowances are increased again when you reach 75. This means that you pay a lot less tax when in retirement than the taxes breaks that you received when you made the contribution and claimed the deduction.
There is not another investment vehicle available to South African investors that can give you this range of tax benefits. In addition, Retirement Annuities have benefits beyond taxation.
Retirement Annuities – Other Considerations
Estate Duty and Executors’ Fees
The Retirement Annuity also has the additional advantage of being a great investment for estate planning. Retirement Savings are not classified as assets in your estate and therefore on death are free of estate duty as they fall outside the estate. Estate duty is currently taxed at 20% of the value of the estate and thus a considerable savings can be made. Generally, the policy proceeds are paid directly to the dependants of the deceased and will therefore not be subject to executors’ fees. This will result in a further saving of 3.5% plus VAT that would have been paid to the Executor of your Estate. With the correct application of a Retirement Annuity the policy owner can prevent an erosion of up to 24% of the value of their Estate. A final advantage is that the transfer to the dependants is done on a tax neutral basis and is not considered a disposal for capital gains tax.
For this reason, the Retirement Annuity is a very handy investment product for individuals who have more funds than they require and wish to set them aside to ultimately benefit their families.
Protection from Creditors
The Retirement Annuity is also protected from creditors as it is not classified as an asset belonging to the individual. This prevents it from being attached to by a creditor to settle a claim against the policy owner. Even if the policy owner is sequestrated their retirement savings, within a Retirement Annuity, is protected and may be accessed only according to the rules and paid only to the owner.
This is an important consideration for individuals who have their own business or who have provided personal surety for other legal entities, whether it is as a result of ownership or directorship of those entities. Other assets owned by the individual could be attached by the creditors, but the Retirement Annuity could never be attached.
Protection from yourself
The Retirement Annuity is protected from the taxpayer – who may not access the funds until age 55 and at which stage you may only withdraw one third of the balance. This ensures that the funds are left to grow over a number of years and that the taxpayer will eventually have the use for which the product was designed, namely, to provide within retirement. The term of the investment is often the biggest contribution to compound growth of the investment.
Asset allocation and offshore exposure
Recently, an amendment to Regulation 28 of the Pensions Fund Act increased the allowed exposure to offshore investment within the fund from 30% to 45%. This was a substantial increase; we now feel that you have adequate exposure the global markets and this enhances the desirability of this product as a long term investment that will provide for you in your old age and protect your investment against Rand weakness and the depreciation of the Rand.
Retirement Annuities – Summary
The benefits of a Retirement Annuity can be summarised in this brief table:
n order for you to claim the tax deduction in the current tax year your contributions to your Retirement Annuity needs to be in the bank account of your product provider before the 29th February 2024. If you have not taken advantage of this tax benefit we recommend you do so before the end of February.
Tax Free Savings Accounts
Tax Free Savings Accounts were launched in March 2015 and have thus been in existence for almost a decade. This product was created in order to encourage South Africans to save even a greater portion of their income, thus reducing the eventual dependence on the State. The big benefit of a Tax Free Savings Account is that no tax payable on any income or growth earned in the investment, similar to retirement savings.
In our opinion Tax Free Savings Account ranks 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.
The Tax Free Savings Account is however ideal for anyone that is already making ample contributions towards their retirement or that have extra cash should be allocated to their Tax Free Savings Account. 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.
Similar to Retirement Annuities your contributions to Tax Free Savings Accounts will only be allocated to your 2024 allowance if received in the bank account of your product provider before the 29th February 2024. Individuals are entitled to contribute a maximum of R36 000 per year to their Tax Free Savings Account, so if you have excess funds available please make sure you take advantage of this opportunity.
Conclusion
You work hard to accumulate income and grow your wealth. Through the correct application of financial products, you are encouraged to save and where possible take advantage of tax allowance making it possible to protect this wealth from tax erosion. We like both products and are happy to recommend using them, due to larger offshore exposure, the RA has become more attractive as long-term investment vehicle. Both the reviewed products are easy to implement, and it is still possible to open accounts and utilise your tax allowances for the 2024 tax year. Please contact Magwitch if you would like assistance in reducing your tax burden.
Recent Comments