Many South African despise paying the vast amount of tax that we do. There seems to be tax on everything – tax on our income, tax on things we buy, tax when we fill up with petrol, even tax when we pass away!
The individual’s marginal rates of tax in South Africa range between 0% and 40%. 40% may seem high, but we are far from having the highest marginal tax rate in the world.
Aruba (a little island in the Caribbean) has a marginal tax rate of 59%, Sweden is at 56,6% and Denmark at 55,4% (just to name a few).
There are ways in South Africa to not pay tax. It can either be done using tax avoidance methods or tax evasion methods. Tax avoidance is the legal way a taxpayer can reduce the amount of tax that he/she owes.
Tax evasion, however, is when a taxpayer illegally avoids paying tax and can get a taxpayer into serious trouble (ask Schabir Shaik or Nicholas Cage).
Some tax avoidance methods individuals can use to reduce their taxable income are highlighted below.
1) Retirement annuity contributions if you have non retirement funding income
Non retirement funding income can be defined as income that is not linked to a pension or provident fund.
You are currently able to contribute a maximum of 15% of your non retirement funding income to a retirement annuity, all of which should be tax deductible.
So, for example, if you earn an income of R 800 000 per annum and do not have a pension or provident fund, you would be able to contribute R 10 000 per month into a retirement annuity-all of which should be tax deductible.
As you are in the 40% tax bracket (with an income of R 800 000 per annum), you would be saving yourself approximately R 48 000 in tax per annum.
If you are on a company pension or provident fund, but have an alternative source of income (such as rental income from property), this rental income would be classified as non-retirement funding income and therefore a retirement annuity can be used to reduce your taxable income in this situation.
2) Income protection premiums
Capital disability pays you the benefit if you are totally and permanently disabled.
For example, someone who is injured in a car accident and cannot work for a few months will not be able to claim capital disability as they will recover from their injuries.
However, income protection is designed to assist individuals to stay afloat should they become unable to work in their own or a similar occupation.
It is a very important benefit that should be considered by individuals. The premiums for income protection are tax deductible.
3) Donating to Public Benefit Organisations
Tax payers are able to donate up to 10% of their taxable income to public benefit organisations and claim a tax deduction on this donation, as long as these public benefit organisations comply with section 18A of the Income Tax Act.
4) Medical aid contributions
Taxpayers under the age of 65 may deduct monthly contributions to medical schemes (a tax rebate to be known as a medical scheme fees tax credit) up to R 230 each for the taxpayer and the first dependant on the medical scheme and R 154 for each additional dependant.
Taxpayers can also claim a deduction for medical scheme contributions exceeding four times the amount of the medical scheme’s fees tax credits and any other medical expenses limited to the amount which exceeds 7.5% of taxable income.
Don’t forget to keep receipts of all these transactions as you will need them when you submit your tax return!
Taxpayers who are 65 years and older, as well as any taxpayer where the taxpayer, the taxpayer’s spouse or child is a person with a disability, may claim all qualifying expenditure as a tax deduction.
As one can see from the above, careful planning can significantly reduce the amount of income tax you owe. Speak to a Certified Financial Planner ®, who should be able to assist you in reducing your taxable income in a legal and intelligent way.