How to reduce your tax bill without resorting to a tax revolt

Economists and analysts are warning South African taxpayers to prepare themselves for a barrage of tax hikes come April 2020, as government scurries to find some way to plug the country’s growing tax gap.

It has become evident in recent years that the country’s tax collector, SARS, is struggling to meet targets for revenue collection, with government’s spending budget only getting bigger.

With tax collection falling short, and government bailouts to SOEs expanding (on top of an overwhelming wage bill), economists have warned that taxpayers will likely have to fork out more in 2020 and beyond, in the form of more taxes.

Some taxes on the cards include adjusted tax brackets for income tax; higher fuel levies and sin taxes; and even a possible VAT hike to 16%, which would be the second such hike after the tax was raised to 15% in 2018.

News of possible tax hikes comes as government keeps throwing billions of rands at failed SOEs and reports of nepotism and corruption persist in government departments, has again spurred talk of a tax revolt among taxpayers.

However, while tax protest via a revolt might seem attractive, dodging taxes is illegal – and analysts have previously noted that the route would be ineffective in South Africa, where such action would likely fail without the support of corporations.

What can be done

According to Stephen Hartzenberg, head of Product Development at 10X Investments, there are other options available to taxpayers before heading into the murky waters of a tax revolt – namely using every legal channel available to you to minimise the tax you pay at the end of the month.

“There is no doubt that people are angry about money wasted on dysfunctional state-owned enterprises and lost to corruption, and for good reason. In such circumstances, it seems perfectly reasonable for people to ask why they should render unto Caesar more than is absolutely necessary,” he said.

“As much as the idea of fighting back may sound righteous – given a belief that the situation seems to call for stern punitive action against the powers that be – but quiet diplomacy can be extremely effective too. The bottom line is: Make sure you have maxed out on tax incentives before considering tax evasion or a tax revolt.”

Hartzenberg said that taxpayers instead have a number of legal (and moral) tools at their disposal, including:

• Contributions to a medical aid (and if you have major medical expenses above a certain threshold);
• Donations to certain charities;
• Investments in tax-free savings accounts;
• Retirement fund contributions.

Retirement funds

Hartzenberg said that contributing to a retirement fund will reduce your take-home pay, but it is effectively moving your earnings (plus the tax you would have paid on them) to a different column on your personal balance sheet.

Importantly, you will get all the tax you have paid on these rands refunded when you file your return the following year, he said.

“How much you get back depends on your tax bracket. If you earn R20,000 per month, you fall into the marginal tax bracket of 26%, which means for every extra rand you earn, 26 cents goes to the state.

“The good news is that this is the rate at which your refund will be returned for retirement contributions. In this example, a R10,000 investment in a retirement fund will result in a R2,600 refund from Sars. In other words, your R10,000 investment cost you only R7,400. That’s a whopping return on investment by any measure.”

Hartzenberg said that there are limits, but they are fairly high.

“You can deduct total contributions to a pension, provident or retirement annuity fund up to 27.5% of your taxable income. The overall limit is R350,000 per annum. In our example, the maximum deduction would be R66,000 (27.5% x R20,000 pm).

“Any excess contributions above the limit can be rolled over to the next tax year and deducted then,” he said.

Read: South Africa’s ‘shock’ medical aid changes explained