Taxpayers with multiple sources of income are often surprised during the tax return filing season when the result of their assessment indicates that they owe money to the South African Revenue Service (SARS), says Carla Rossouw, tax lead at Allan Gray.
“If you are an annuitant who earns income from different sources – which may include annuities from multiple providers, or if you have other sources of income such as a salary, rental income or interest income – you could be in for an unexpected tax bill.”
How is it possible to end up with an unexpected tax bill?
Consider a taxpayer who earns a salary from their employer and draws an annuity income from their Living Annuity provider, Rossouw said.
Both the employer and provider are required to deduct Pay-As-You-Earn (PAYE) tax from the income they provide to the taxpayer and pay it over to SARS.
“But both parties only have sight of the income that they provide to the taxpayer, so they both apply the annual tax rebates when estimating the taxpayer’s tax liability – and these rebates are only meant to be applied once.
“They may also be applying the incorrect tax rate (i.e. too low a tax rate) since they do not have sight of the taxpayer’s total taxable income, and the aggregate of the taxpayer’s income may push them up to a higher tax bracket,” Rossouw said.
South African taxpayers pay income tax on their local and worldwide taxable income, which is added together to determine their overall tax liability for the tax year.
When the taxpayer in the example files their tax return, the result of the assessment is that they have a tax liability that exceeds the employees’ tax already withheld by their employer and living annuity provider during the year of assessment, and they owe money to SARS, said Allan Gray.
“Most taxpayers in this situation do not foresee the additional tax liability, since they assume the tax withheld by their employer and/or annuity provider will be sufficient. This creates an unexpected cash flow burden and tax debt.
“The tax liability on your total taxable income from multiple sources may therefore be much higher than the combined amount of PAYE tax which was withheld from each source of your income during the tax year,” said Rossouw.
Table 1 gives an example of how the combined taxable income would be calculated in the case of a taxpayer who is 66 years old and received a salary of R280 000 plus an annuity of R220 000 during the 2020/2021 tax year.
After submission of their annual income tax return, the total tax liability on assessment is significantly higher than the total PAYE that was deducted by the employer and annuity provider during the year, said Rossouw.
“This means the taxpayer owes SARS an additional amount on assessment because too little tax was deducted monthly by way of PAYE, as the employer and annuity provider did not have sight of the taxpayer’s total taxable income.”
How to avoid an unexpected tax bill
To help taxpayers who receive income from multiple sources avoid a surprise tax bill, the Income Tax Act allows you to make additional voluntary tax payments.
“The best way to manage this is to understand your total tax liability, taking your multiple income sources into account, which will enable you to calculate an appropriate tax rate,” said Rossouw.