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Tax Benefits of Retirement Annuity Funds
Your decision to start saving and investing for your retirement is possibly one of the most important decisions you will ever make.
Not only are you planning ahead, but you’re also reaping major tax benefits. Start saving tax, TODAY!
What is a retirement annuity?
A retirement annuity (RA) is a personal retirement savings vehicle.
RA’s are created and sold by financial institutions that invest your contributions in order to pay you a lump sum and/or monthly income once you reach retirement.
It is not possible to withdraw funds from your RA before you reach the age of 55.
Investing in a retirement annuity further offers a number of attractive tax benefits. This means that the South African Revenue Service (“SARS”) is actually funding part of your retirement savings.
Besides annual tax refunds, other benefits include:
- no tax on interest, dividends or capital gains until your retirement date;
- protection against creditors; and
- protection against yourself (you can’t touch the money until age 55).
- Also, the funds housed in your RA do not form part of your estate, which means that this money will not be subject to estate duty or executor fees
Examples of how an RA provides tax relief
Let’s look at some examples of how RA contributions can affect your annual tax bill.
To keep the calculations simple and to focus solely on the tax relief offered by saving for retirement, we assume in the example that you had no other tax-deductible expenses, such as medical aid premiums, and made no donations to public benefit organisations.
We also assume that you are younger than 65. After age 65 you enjoy higher tax rebates.
Example: You earn R500 000 and contribute 15% to an RA
Using the SARS 2021/22 tax tables and current primary rebate of R15 714, we calculate that you would pay income tax of R106 725 if you do not contribute any amounts to a retirement fund.
However, your 15% contribution to an RA (0.15 x 500 000 = 75 000), for the financial year, would reduce your taxable income from R500,000 to R425,000. As a result, your tax liability is R81,850.00, not R106 725 .
This means, if you earn R500,000 during this tax year, your 15% contribution to an RA will save you R106 725 – 81 850 = R24 875 in tax.
How to calculate your retirement annuity tax relief
Although you are free to contribute as much as you want to your RA on a yearly basis, the retirement annuity tax relief is capped at a certain amount (a maximum rate of 27.5% of taxable income or remuneration, subject to a Rand cap of R350 000). Remember, this R350 000 cap (and the 27.5% limit) include the contributions you make as a member to a workplace pension or provident fund.
Should your investment exceed the cap for the year, disallowed contributions can be used in the future.
Need assistance with this calculation in order to make an informed decision? We’ve got you covered!
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.
If you are a normal salary earner, this blogpost might not be for you, but should you earn any extra income other than a salary, then you might want to read on.During these difficult times of COVID-19 and lockdown regulations, more South Africans are turning to entrepreneurship as a way of making a living. Whether it is hustling by selling masks and hand sanitiser, renting out a property or rendering a service in your personal capacity. Entrepreneurship is an integral part of the South African business culture.
People operating a business in their own name, better known as sole proprietors, often underestimate the tax benefits they can utilize. One of the most misunderstood topics relating to tax is the operating expenses that can be deducted against taxable income earned.
To clarify, this blogpost will focus on tax deductible expenses in relation to sole proprietors as well as individuals who earn income outside of a normal salary.
Tax deductible expenses
SARS describes tax deductible expenses as “expenses incurred in the operation of a business”. Therefor expenses incurred in the production of income are deductible for tax purposes. The following may be expenses you could consider deducting the next time you complete your ITR12:
- Day-to-day business expenses
These types of expenses are incurred in the operation of the business and are deductible from taxable income under section 11(a) of the Income Tax Act of South Africa. They include, but are not limited to –
- Material and equipment costs
- Employee costs
- Office rental
- Office supplies
- Telephone and internet costs
- Travel and vehicle maintenance costs
- Bank fees
- Utilities
- Insurance
- Marketing
- Cleaning
It is important to note that you, as the taxpayer, will be responsible to keep all supporting documents relating to these expenses, as SARS may require you for proof of expenses incurred, should your assessment be selected for audit.
2. Certain capital expenses
Capital expenses refers to costs incurred for goods or services intended to be used in the long-term by the business, for example:
- Computers
- Equipment
- Machinery
Section 11(e) of the Act, along with interpretation note 47 requires capital expenses to be written off over a period. For example, a personal computer can be written off over 3 years, and small assets with a cost of R7 000 or less may be written off in the same year.
3. Entertainment expenses
Any expenses incurred while entertaining clients can be deducted as a business expense for tax purposes. This includes meals, drinks, venue hire etc. Something important to remember when claiming entertainment expenses, is that the burden of proof is on the taxpayer to provide SARS with reasonable assurance that the entertainment expenses incurred were for business purposes.
4. Business start-up expenses
This refers specifically to expenses incurred before the business started any form of trade.
Where the lines blur
The expenses deducted for purposes of income tax submission, should relate directly to your business activities and any personal expenses incurred may not be deducted as business expenses.
Let’s say, for example, that you as the taxpayer, operates from a home office. Internet costs, telephone, cleaning, electricity, rent etc. are all expenses which could be for both personal and business use. Expenses like rent, cleaning and electricity should then be apportioned to the business by using the surface of the home office as an indicator. The burden of proof will be on the taxpayer to satisfy the South African Revenue Services that an accurate measurement was used to determine the business part of the expense.
There are some monthly habits that could make it easier for you to identify business expenses when the tax season opens. For instance, keep a separate set of records for business and personal expenses and keep record of all income received and expenses incurred. Also remember to document the method you used to determine which portion of an expense is attributable to the business.
Conclusion
Remember that only expenses related to your business activities, or a portion thereof, can be deducted against income earned for purposes of calculating your income tax liability. Should you be uncertain whether or not an expense is deductible for tax purposes, please consult with your accountant.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.
Let’s take a look at Provisional tax, who needs to register therefor and briefly touch on the due dates for payments to be made by a Provisional taxpayer, as is required by the South African Revenue Services (“SARS”).
| Term used | Description |
| Provisional tax return | Provisional tax return Return to be submitted to SARS (IRP6), bi-annually on 28 February and 31 August, calculating the provisional tax liability of a taxpayer, based on an estimated taxable income of that financial year. |
| Income tax return | Final return (IT12) to be submitted to SARS, on a yearly basis, calculating the tax payable or refundable based on your taxable income of that financial year. |
| Provisional tax Payment | Payment due to SARS based on the estimated tax liability which was calculated and submitted through the Provisional tax return. |
| Income Tax Payment | Payment due to SARS based on the actual tax liability which was calculated and submitted through the Income tax return. |
What is Provisional tax?
Provisional tax is not a separate form of Income Tax, but rather simply a way of paying your Income Tax to SARS in bi-annual tranches, as opposed to sitting with a tax liability when submitting your Income tax return to SARS.
Upon assessment of the final Income tax return, the Provisional tax Payments made to SARS in advance, will be off set against the amount due to SARS in respect of your Income tax return for the relevant year of assessment.
Provisional tax Payments is therefore an advance or prepayment of a Taxpayer’s normal Income Tax due to SARS in a specific year of assessment.
Who should register as a provisional taxpayer?
Any person who receives income (or to whom income accrues) other than a salary, is regarded as a provisional taxpayer. Income would typically include receival of rental income, interest income from investments or any other income received form the carrying on of any trade.
A taxpayer, earning income other than a salary, will not be required to register as a provisional taxpayer, as long as –
⦁ his taxable income for the year of assessment will not exceed the annual tax threshold, or
⦁ his taxable income which is derived from interest, dividends, foreign dividends and rental from the letting of fixed property will be R30 000 or less for the year of assessment.
Most salary earners are therefore non-provisional taxpayers if they have no other sources of income.
Companies, trusts and joint ventures automatically fall into the provisional tax system, irrespective of their source of income.
Provisional tax payments
The provisional tax liability is based on your taxable income for the tax period (i.e. 01 March to 28 February). The provisional tax liability is split into two payments. The first provisional tax payment is due by 31 August (mid tax season) and the second provisional tax payment is due by 28 February (end of tax season).
There is an optional third provisional tax payment at the end of September (seven months after the close of the financial year), in the event that the amount paid during the first and second provisional tax period is less than the income tax payable to SARS for the financial year.
The above dates can be outlined on a timeline as follows:
Interest and Penalties
It is important to note that your second provisional tax payment is the most important payment due and payable to SARS, as SARS can impose harsh penalties and interest on taxpayers that fail to submit their provisional tax return, fail to pay the second provisional tax to SARS in a timely manner or declares a lesser amount of income to SARS in relation to the declaration made under the final income tax return.
Two penalties are potentially levied in respect of the second period, namely –
⦁ a penalty for the late payment of provisional tax; and
⦁ a penalty for the underpayment of provisional tax as a result of underestimation of taxable income.
Penalty for late payment:
Late payments are subject to a penalty of 10% of the total tax amount payable.
Underestimation Penalty
The penalty amount is different for taxpayers whose taxable income is more than R1 000 000 than those earning less than R1 000 000.
⦁ Taxable income of R1 000 000 or less
If your estimate in your second provisional tax return turns out to be less than 90% of your actual annual taxable income, a penalty will be imposed by SARS.
The penalty is calculated at 20% of the difference between the normal tax payable on your estimate and the lessor of:
⦁ tax on 90% of your taxable income
⦁ the basic amount issued by SARS.
⦁ Taxable income of greater than R1 000 000
If your estimate in your second provisional tax return turns out to be less than 90% of your actual annual taxable income a penalty will be imposed by SARS.
The penalty is calculated at 20% of the difference between the normal tax payable on your estimate and tax calculated on 80% of your actual taxable income.
If you are uncertain about whether to register as a provisional taxpayer or how to register, please give us call at The Finance Man and we will answer all your questions.
We end this post with a quote from Robert T. Kiyosaki, the author of the very successful book Rich Dad, Poor Dad:
“The single most powerful asset we have is our mind.
If trained well, it can create enormous wealth.”
Keep following us on our blog for more interesting topics on taxes and finance.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.