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How can I reduce my tax liability?

How can I reduce my tax liability?

South Africa’s current tax laws allow limited opportunities for individuals to reduce their tax liabilities. The following is a brief explanation of the most commonly allowed tax deductions. Tax matters are often complicated and will differ from individual to individual. The best option is to consult with a registered tax practitioner for professional advice or consult the SARS-issued Comprehensive Guide to the ITR12 Tax Return for Individuals and other relevant guidelines and applicable tax law.

Retirement Plan Membership

Pension Fund  Contributions

If you or your employer contribute to a registered pension fund, you are entitled to deduct these contributions, limited to the greater of:

  • 7,5% of the income derived from the employment that contributes to this retirement fund, or
  • R1,750

Any portions of the contributions not deducted, cannot be carried forward to the next tax year but are allowed in calculating your tax-free portion of the lump sum that will pay out upon your retirement.

Retirement Annuity Fund Contributions

Any contributions to a registered retirement annuity fund are deductible, but limited to the greater of:

  • R1,750
  • R3,500 less the amount you claimed against your pension fund contributions (above)
  • 15% of the taxable income that does not contribute towards your retirement fund (remuneration not subjected to pension fund contributions).

Any portions of the contributions not deducted, may be carried forward to the next tax year.

Income Replacement Policies

An income replacement policy is a policy that will cover an individual against the loss of income as a result of illness, injury, disability, or unemployment (this does not refer to any possible UIF benefits).

The total premium contributions to an income replacement policy are tax-deductible. Any successful claim against an income replacement policy will be considered as taxable income during the specific tax year in which the claim is paid (income received).

Travel Allowance

When can you claim for travel?

The Income Tax Act No.58 of 1962 allows taxpayers who receive a travel allowance to claim a deduction for the use of their private
vehicles for business purposes. It is important to note that travel between your home and place of work cannot be claimed and is
regarded as private travel.

What do I need to do to claim?

In order to claim a deduction, the first step is to record your vehicle’s odometer reading on 1 March each year (the first day of the tax year for individuals), and again on the last day of February the following year (the last day of the tax year for individuals). The difference
between the closing and opening, readings will give you your total kilometres travelled for the year.

It is now compulsory to keep a logbook of all your travel in which you record your business kilometres if you want to claim a travel
deduction. The logbook must contain the following minimum information relating to your business travel:

  • Date of travel
  • Kilometres travelled
  • Travel details (where to and reason for the trip)

Once you have taken down these readings and worked out your total travel for the year, you can start calculating your travel deduction.

Note: Where you used more than one vehicle in the tax year, a separate logbook must be kept for each vehicle that was used.

You now need to calculate what portion of the total kilometres travelled during the tax year was for business use.

Once you have calculated the actual business kilometers traveled during the tax year you can calculate your allowed deduction in one of two ways:

  1. You can calculate your claim based on the table of costs supplied by SARS each year. You need not have kept an accurate record of all
    your expenses – simply use the costs linked to the value of your vehicle as provided by SARS. The Fixed Cost Table: 1 March 2021 – 28 February 2022 is provided below.
  2. Alternatively, you can calculate your claim based on the actual costs. You will have to have kept an accurate record of all your expenses during the year, including fuel, maintenance, lease, and insurance costs.

Fixed Cost Table: 1 March 2021 - 28 February 2022

Vehicke Value (incl. VAT) (R) Fixed cost (R p.a.) Fuel cost (c/km) Maint. cost (c/km)
1 - 95 000 29 504 104.1 38.6
95 001 - 190 000 52 226 116.2 48.3
190 001 - 285 000 75 039 126.3 53.2
285 001 - 380 000 94 871 135.8 58.1
380 001 - 475 000 114 781 145.3 68.3
475 001 - 570 000 135 746 166.7 80.2
570 001 - 665 000 156 711 172.4 99.6
exceeding 665 000 156 711 172.4 99.6

Commission Earners

Who qualifies?

Employees that earn more than 50% of their annual income in commissions are allowed to deduct all of their bonafide commission related expenses against their commission income including:

  • Qualifying home office expenses
  • Employee costs
  • Communication costs
  • Travel expenses
  • Depreciation costs
  • Entertainment costs

You will have to keep detailed records of all expenses incurred in generating commission earnings and be able to justify the legitimacy of any expense as SARS is likely to verify your deductions to ensure tax compliance.

Tax-Free Investment

What is it?

Tax Free Investments were introduced as an incentive to encourage household savings.  This incentive is available from 1 March 2015.

How does it work?

The tax-free investments may only be provided by a licensed bank, long-term insurers, a manager of registered collective schemes (with certain exceptions), the National Government, a mutual bank, and a co-operative bank.  Service providers must be designated by the Minister in the Gazette. As per the current Regulation, only the above are designated.

  • You don’t have to pay income tax, dividends tax, or capital gains tax on the returns from these investments.
  • A person is limited to an annual limit reflected in the table below.
  • Currently, there is also a lifetime limit of R500 000 per person.
Year of AssessmentAnnual Limits in Rands
201630 000
201730 000
201833 000
201933 000
202033 000
202136 000
Which accounts will qualify as Tax-Free Investments?
  • Fixed deposits
  • Unit trusts (collective investment schemes)
  • Retail savings bonds
  • Certain endowment policies issued by long-term insurers
  • Linked investment products
  • Exchange-traded funds (ETFs) are classified as collective investment schemes.

Note that when returns on investment are added to the capital contributed, the balance may exceed both the annual and/or lifetime limit.  The capitalisation of these returns within the account does not affect the annual or lifetime limit.

  • If a person invested R36 000 for the 2021 year of assessment and receives a return of R5000 interest on his annual tax-free investment of R36 000 (which is capitalised), the total amount in the account will now be R41 000. The interest amount of R5000 is not regarded as a contribution.
  • Transfers between tax-free investment accounts are effective from 1 March 2018. Parents can invest on behalf of their minor child.  The minor child will use his/her own annual or lifetime limits.
  • Tax-free investment accounts cannot be used as transactional accounts.
  • Debit or stop orders and ATM transactions will not be possible from these accounts.

Service providers (as per above) will provide SARS, twice a year, with the following info:

  • Total contributions per tax year;
  • Total amounts are withdrawn per tax year;
  • Total amounts transferred per tax year;
  • Total returns on investment for example interest, dividends, capital losses and capital gains

The service providers will also provide taxpayers invested in these products with the above information by issuing an IT3(s) Tax-Free Investment certificate annually.

Donations to Approved Charities

Donations are tax deductible, if they are made to:

Sole Proprietors

Who Qualifies?

A sole proprietorship is a business that is owned and operated by a natural person (individual). This is the simplest form of business entity. The sole proprietorship is not a legal entity. The business has no existence separate from the owner who is called the proprietor (sometimes also referred to as an independent contractor or freelancer).

The owner must include the income from such business in his or her own income tax return and is responsible for the payment of taxes thereon. A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name. The fictitious name is simply a trading name – it does not create a legal entity separate from the sole proprietor owner.

Only the proprietor has the authority to make decisions for the business. The proprietor assumes the risks of the business to the extent of risking all of his or her assets whether used in the business or not.

It provides the lowest barriers to trading but unlimited legal liability for the proprietor.

Deductions Allowed

A Sole Proprietor can claim all legitimate business expenses incurred in the production of their business income. This is very similar to a Company. These expenses include:

  • Accounting & Legal costs
  • Sales & Marketing costs
  • Rentals
  • Office administration costs (internet, telephone, stationery, printing, etc).
  • Finance & leasing costs
  • Transportation costs
  • Depreciation
  • Employee/Subcontractor costs

You will have to keep detailed records of all expenses incurred in generating your income and submit Financial Statements to SARS as part of your personal tax return and most likely also to any credit provider or financial institution you deal with.

Contact Onestop Accounting if you require assitance with any tax related issue.

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