How to (legally) lower your tax bill in South Africa

South Africa is officially in tax season, and there are several ways that South Africans can lower their tax bill.

Tax season is starting today, 7 July 2023, at 20h00, and the South African Revenue Service (SARS) has already sent auto-assessment to various taxpayers nationwide.

Although tax season is a stressful time, and many loathe the idea of submitting their tax returns, there are multiple ways that South Africans can claim a refund from SARS.

Crystal Venter and Monique Spray, tax experts from Tax Consulting SA, outlined six different ways that South Africans can claim relief from their tax bill – all perfectly legal and above-board:

Donations

Donations made to an 18A-approved organisation that engages in public benefit activities are tax-deductible – limited to 10% of the taxpayer’s income.

However, should the donation for the relevant year exceed the 10% taxable income threshold, the disallowed portion will then be used the following year while also being subjected to the same limit.

Venter and Spray said that it is important to note that not all non-profit organisations are S18A-approved.

SARS will only see the donation as deductible if the organisation has a Section 18A certificate.

To claim the refund, the taxpayer must complete the ‘Donations’ section on the ITR12 form.

Medical Aid Scheme

Medical Aid Scheme members will qualify for tax relief through tax credits, which are then subtracted from the taxpayer’s annual personal tax liability.

The rebate is in the form of a ‘Medical Scheme Fees Tax Credit’ and applies to the monthly contributions made by the main member and dependents.

There is also an ‘Additional Medical Expenses Tax Credit,’ allowing for further relief by taking into consideration ‘Excess medical aid contributions’ and the ‘Qualifying out-of-pocket medical costs’.

In certain qualifying instances, an additional medical expenses tax credit is also available if the taxpayer, their spouse, or a dependent has a disability. Crucially, SARS requires the taxpayer to enclose in their income tax return submission a completed “Confirmation of Diagnosis of Disability form” (ITR-DD form) to claim the relief.

When claiming relief, if the employers are paying the contributions, the employers will use the credit system to lessen the employee’s monthly PAYE.

If the taxpayer pays the contributions independently, the monthly PAYE will not be adjusted, and the credit will be claimed as a refund when the annual return is submitted via the ITR12 form with a valid medical aid tax certificate issued by the relevant fund.

Retirement Annuities

Taxpayers who contribute to a retirement fund will also be entitled to a tax deduction. This includes contributions to retirement annuities, pension funds, and provident funds.

The total contributions towards these funds are limited to 27.5% of the greater remuneration or taxable income (excluding lump sums), capped at an annual limit of R350,000. The total contributions made by employers are also limited to this criteria.

Employees who earn a monthly salary will have the contributions made by their employer added to their remuneration package as a taxable fringe benefit, which also serves as a deduction. Essentially, the tax deduction will reduce PAYE withheld from the taxpayer’s salary each month.

If the total retirement fund contributions are above the aforementioned threshold, the excess contributions will be carried over to the following year of assessment, which can be used to reduce the taxable share of the taxpayer’s living annuity or even decrease the tax they need to pay on a cash lump sum payout.

In terms of claiming the refund, if the contribution is made via the employer, these contributions will be reflected on the IRP5 tax certificate under the relevant source code and will be automatically considered by SARS.

However, if the contributions are not made by the employer, the taxpayer will be required to obtain a Retirement Annuity Tax Certificate from the relevant institution and ensure that the ‘Retirement Annuity Fund’ section is completed on the ITR12 form.

Home Office

If the taxpayer is employed, earning a normal monthly income and mainly based at their home, they will be able to claim a deduction for their home office.

The deduction includes running costs, such as, but not limited to, rental paid, water, electricity, levies and other body corporate-related fees.

Crucially, the taxpayer must meet all the following requirements:

• A designated room in their home, which is exclusively used for work purposes
• The office must be specifically equipped for the taxpayer’s work and must be specifically fitted with the relevant instruments, tools, and equipment required for the work.

If they do not meet all of these requirements, then they will not be able to claim a home office reduction.

To claim the relief, taxpayers must first ensure that all the abovementioned requirements are met, then calculate the total square meterage of the home office in relation to the total square meterage of the property as a percentage.

The percentage is then applied to the home office expenditure to calculate the portion which is deductible.

This deduction may be applied for on the ITR12 form under the ‘Allowable Deductions’ section.

Tax-free saving account

Several financial institutions in South Africa offer taxpayers the opportunity to invest their money in a Tax-Free Savings account.

The distinction between this and other investment accounts is that all returns will be tax free for the investor.

The annual contribution limit is R36,000 per year, and the lifetime limit is R500,000.

It should be noted that there is no limit on the number of accounts or the carry-over of annual contributions. There is, however, a 40% penalty that will be imposed by SARS should the annual or lifetime limit be exceeded.

To claim the relief, taxpayers will be issued an IT3(s) tax certificate by the relevant financial institutions, which contains details for contributions, interest, and dividends for the assessment year. This information should be captured in the “Tax-Free Investments” section on your ITR12 form.

Travel allowance

Taxpayers receiving fringe benefits in the form of a travel allowance or an employer-provided vehicle may be able to claim based on the total kilometres travelled solely for the purposes of business.

To claim the benefit, taxpayers must keep a detailed and accurate logbook indicating the kilometres travelled for business and other personal-related affairs. All proof of qualifying expenses should also be kept.

The deduction can also be applied for on the ITR12 form.

Read: Tax auto assessments in South Africa – everything you need to know