How to keep some of your hard-earned cash from the taxman

TALI FEINBERG

“You need a basic understanding of the tax deductions you are allowed given your circumstances. This is a challenge as most people don’t ‘speak tax’,” says chartered accountant Graham Shapiro.

“Unfortunately, we can’t stop earnings going to the taxman, but if you are able to, you can structure your life in the most tax-efficient way possible. In saying this, you have to ensure that your structure is above-board or you could run into issues.

“The taxman isn’t seeking to catch us out. It generally looks at areas where we are trying to catch it out. It won’t deny tax reductions based on legitimate claims, but when we try and claim too much, it will ask questions, and it generally knows what to ask.

“The South African Revenue Service (SARS) is the most efficiently run institution in this country,” says Mike Becker of Oracle Brokers, a certified financial planner with the Financial Planning Institute and a registered tax practitioner with the South African Institute of Tax Professionals. “There is no discrimination [when it comes to] tax. Every person is treated the same.

“Yes, it can be painful to deal with call centres and queues, and paying tax can be daunting. That’s why it’s important to have a good tax practitioner to deal with the technical stuff.”

For those on a salary, Becker says the best way to get a tax deduction is still via a retirement annuity. Medical aid also comes with a formulation to get tax back.

His advice to anyone struggling financially is to pay off debt first. “It frees up so much money. If you have anything extra, put it into paying off large debts.”

To high-net-worth individuals, he suggests that a tax efficient way of investing is through an endowment, which is taxed at 30% as opposed to the usual 40%.

“For non-salaried employees, you can often deduct expenses related to earning your income,” Shapiro says. “It’s worthwhile to keep a spreadsheet of all of these, and additionally to keep proof of these expenses.”

Owning more than one property can also be a tax nightmare. “When you own more than one property, say for investment purposes, you need to run each property like a mini-business where you earn rental and incur expenses. Each property will make a profit or a loss, which needs to be declared to SARS,” he says. “You also need to be aware that when you sell a property, you will need to pay tax on any profit if you sold for more than you purchased it for. There are instances when you get relief from profit on selling your property, but only if it’s your primary residence.”

Conrad Viljoen, the head of tax debt management at TDM, a division of Thomson Accountants, emphasises that it’s important not to forget to declare any sale of properties. “SARS is now issuing estimated assessments when a taxpayer doesn’t declare the capital gains on the sale of the property. It can issue an understatement penalty of up to 200%. He emphasises that if you have a rental property, you also have to declare your rental income.

“There are also expenses, such as interest on the bond, which a taxpayer can claim to reduce the profit. A taxpayer is not entitled to the primary residence exclusion (CGT) on a rental property.”

Says Shapiro, “If you are going to take out a retirement annuity, or invest in tax-free savings or even Section 12J schemes which offer short-term tax reductions, ensure that you understand that although you may pay less tax tomorrow, there will be tax implications in the future. You also need to understand the limitations you have on accessing those savings and investments in the future.

“To take advantage of tax benefits as a salaried employee, you need to educate yourself. Everyone’s situation is unique, and you can approach your employer if there is a way to structure your salary in a better way which meets employment needs and circumstances.”

Shapiro believes that you should always get financial advice before embarking on any sort of investment. “Before choosing an appropriate person for advice, check that they are authorised by a regulatory body to provide that advice. Make sure you understand the advice you are getting and all the implications of any investment you are making. Don’t dive into anything just because you heard it’s good, or everyone else is doing it. It’s always prudent to get a second opinion, especially when dealing with retirement savings.”

Says Viljoen, “A financial planner can provide a taxpayer with detailed explanations as to how to contribute to retirement annuities and so on, which are tax deductible, and which will increase your refund. Always make sure that as a taxpayer, you make donations to a registered public-benefit organisation/non-profit organisation which can provide you with a section 18A certificate. A donation is not deductible without this certificate.”

While the economic climate in South Africa is tough, “technology and the changing face of work allows you to assess your own skill set and see if you are able to make extra income in your spare time”, says Shapiro. “Keep updated with avenues where you may be able to have a ‘side gig’. It’s also important to ensure that your employer is okay with you doing something on the side.”

He emphasises the importance of saving. “If you are able to set money aside at the end of the month, it’s a very good idea to do so, instead of spending on unnecessary items that you want. If you are going to borrow money, make sure you know the costs of borrowing, and ensure that you have adequate finance to repay the credit. Ultimately, it takes a lot of discipline but requires you to be honest with yourself about your financial standing.”