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Albert Einstein is accredited with stating that the hardest thing in the world to understand is the income tax.  I am of the opinion that if he was alive today he would probably alter that position and cement that notion that income tax is easy to understand, but that every other form of tax is a complicated nightmare.

Indirect Taxes (VAT, fuel taxes, customs & excise, etc) are becoming a greater source of revenue for our country’s government and additions such as Capital Gains Tax (which is actually a form of income tax and not an indirect tax) are proving to be more of a pothole for many taxpayers year on year.  While our income tax legislation remains relatively simple when compared to countries such as Australia and The USA, it can be argued that with a reform on our tax legislation set to happen in the near future, things will change.  The need to know and understand tax is becoming key to any taxpayer’s prospect of successful planning and ultimate tax savings and it is not just about liability anymore, but also compliancy.

When we look at the recent budget proposal set by Minister Pravin Gordhan there were very few suprises….in fact there were none.  While income tax thresholds for individual taxpayers and Small Business Corporations were increased slightly, the net effect of any relief will be neutralized by any increase in income that a taxpayer receives, especially if the increase is above the rate of inflation.

In unpacking the 2014/2015 budget proposal, here are some key points for the average individual taxpayer to bear in mind when trying to save tax:

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Save for Retirement:  While I do not necessarily advocate a Retirement Annuity (RA) as a basket you put all your eggs into, there certainly is a benefit to having one to contribute to as a taxpayer.  The obvious benefit is the tax deduction that one will enjoy against tax paid as a result of the contributions.  Another benefit is that the actual RA on retirement, when part of a balanced investment portfolio, will certainly supplement the retirement nest egg.  A further benefit is any rolling balance from unclaimed tax deductions in previous years of tax assessments will be utilized when having to calculate the tax payable on retirement from the fund.  Of all the tax saving mechanisms available to taxpayers that can be classes as a “no-brainer”, this still remains the most untapped strategy for many.

  1. Medical Expenses & Disability:  Many taxpayers are unaware of the meaning of disability as defined in the income tax act and the ramifications of such definition if their spouse and / or dependents / children are ‘disabled’.  Disability is a legal concept and not necessarily a medical definition under income tax legislation.  As a result, the savings that one can still derive from medical expenses paid for “out of pocket” can still prove to provide some further tax relief in spite of the medical tax credit system.
  2. Do not sin. We have these famous “sin taxes” in South Africa levied on cigarettes and alcohol etc.  Without fail, the Finance Minister sees it wise to raise the taxes on these items every year (and has done so for a good number of years.)  The interest thing is that in spite of the raised taxes on these products, statistics show that sales have not declined and have in fact shown increased sales.  A good way to guard one’s health and not pay more “tax” would simply be to quite smoking and drinking all together.  A far cry from a million dollar tax strategy, but a simple one nonetheless.
  3. If you want to claim it, you must prove it:  Capital Gains Tax (CGT) has arguably been that tax that has thrown the proverbial cat among the pigeons.  SARS have undoubtedly attended to essential housekeeping rules that have positioned them to know more about the taxpayers asset base, and in knowing that, have successfully been able to collect on any tax due as a result of a gain made on the sale / realization of an asset made subject to CGT.  The basic formula entitles a taxpayer to deduct from the sale /realization price the base cost of the asset.  The actual cost of the asset together with improvements thereto can be used to work out a base cost in order to minimize the net effect of CGT.  However, if you lay claim to an improvement you must be able to account for it and provide SARS with the required supporting vouchers (receipts, proof of payment, etc).  SARS will disallow expenses that cannot be proved.  As it currently stands, 33% of the gain made for individuals (66% for Close Corporation, Companies and Trust) will be included in the taxable income of the respective taxpayer, which in turn will be taxed at the taxpayer’s applicable rate of tax.

When it comes to tax matters, ignorance is no longer a legal defense for the taxpayer (in fact it never really was) and tax administration has changed the landscape quite significantly.  Being familiar with the respective landscape will allow a taxpayer to successfully navigate through the winds of change in order to legally avoid paying more tax than one should.

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