28 February is the end of the tax year for all individuals, trusts and many companies and close corporations in South Africa.
To help you get your filings in order, Desiree Goodwin, client service manager for Meredith Harington, has released 5 tips and “loopholes” to help you save money on your taxes.
1. Top up your retirement annuities
Up to 27.5% of taxable income, capped at R350,000 per year, may be deducted from your income in respect of retirement annuity contributions made before 28 February, notes Goodwin.
“If this could affect you, now is the time to speak to your financial planner.”
2. Donate to the family trust
According to Goodwin, each individual taxpayer may make donations up to R100,000 per annum free of donations tax.
“If one is using a trust for estate planning (or any other) purposes, such donations might be made to the trust. This has the effect of lowering the personal estate and increasing the assets of the trust,” noted Goodwin.
“Both the taxpayer and spouse may make tax-free donations as described, provided this is done before 28 February.”
3. Minimise the taxation of your trust income by distributing before year end
The income received by or accrued to a trust will be taxed (at high rates) unless:
- The income is attributable to the founder and taxed in his hands; or
- The income is distributed to a beneficiary within the same tax year. The beneficiary/ies would then be taxed on such income unless one of the attribution rules apply.
“As the tax rate of beneficiaries will often be lower than that of the trust, it makes sense, from a tax point of view, to distribute some or all of the taxable income,” noted Goodwin
“Of course there might well be other factors in deciding what portion, if any, of a trust’s income should be distributed. The needs, estates and tax position of each beneficiary should be considered before a decision is reached by the trustees. Of critical importance is that such distributions are only made to beneficiaries recorded in the trust deed.”
“It is worth remembering too that distributions to beneficiaries do not require to be made in cash, and the terms of eventual payment by the trust should be carefully considered by trustees, having regard to the current liquidity and future cash requirements of the trust to fulfil its responsibilities to all beneficiaries.”
4. Use a tax-free investment account
In March 2015, the government introduced a tax-free investment product to encourage South Africans to save after-tax money.
“You can invest R30,000 per year (up to a maximum of R500,000 over your lifetime) and benefit from growth free of dividends tax, income tax on interest and capital gains tax.”
5. Taking advantage of the Capital Gains Tax (CGT) exemption
All individuals are entitled to an annual exclusion of R40,000 on any capital gains earned during the tax year.
“By selling certain growth assets before year-end (e.g. unit trusts) and re-purchasing them shortly thereafter, the tax-payer can make use of this annual exclusion and increase the base cost of his or her portfolio.”
“By increasing the base cost of the portfolio, the eventual CGT on disposal of the assets is reduced. Of course transaction costs will have to be considered in making this decision.”