With tax season officially open, Judy Snyman, fiduciary specialist at AlphaWealth, offers some tips on ways that individuals, and possibly companies and trusts, can reduce their income tax liability.
Investing in VCCs
There is a way to invest in upcoming businesses while reaping some tax benefits. To do this, you have to invest in 12J Venture Capital Companies (VCCs). “Investors are entitled to deduct the full amount of their investment from their taxable income in the tax year. The tax relief is 41% for individuals and trusts and 28% for companies which significantly enhances the potential return and helps to mitigate the investment risk,” explained Snyman.
Through VCCs the government aims to stimulate the economy and promote investment in small and medium-sized businesses, while also providing tax benefits to investors. The tax benefits of investing in a VCC include:
- The full amount invested in a VCC is 100% deductible from your taxable income in the year in which the investment is made. This applies to individuals, companies and trusts.
- An investor in a VCC will therefore obtain a 41% tax break (for an individual tax payer at maximum marginal rate) at the time of investment.
- If the investment is held for five years there is no tax recoupment.
Tax-free savings accounts
These accounts enable you to save up to R30 000 a year and R500 000 in your lifetime, tax free. There are a range of products available on the market suitable for all risk types. You do not pay any tax on the growth of your investment unless you exceed the annual and/or lifetime limits.
Snyman stated: “You save in a specially designated fund/account without there being any tax payable on the capital gains realised or the interest or dividends received on these investments. This is different to a pension/retirement annuity where your main tax saving is on your upfront contribution.”
RAs, pension and provident funds
Retirement vehicles like pensions, provident funds and retirement annuities (RAs) offer various tax benefits. These include:
- Your contributions are tax deductible. You can deduct up to 27.5% of your gross remuneration or taxable income, whichever is higher, to an annual limit of R350 000 towards your pension, provident fund or RA.
- Any returns on your investment are tax free. In other words, there is no income tax or capital gains tax on the return earned in an RA.
- “Benefits are taxed on a favourable basis – lump sum benefits are taxed on a sliding scale with no portion of the benefit tax free,” noted Snyman.
Donations to charities
You can donate up to 10% of your taxable income to public benefit organisations (PBOs) and claim a tax deduction on this donation. However, this is only applicable if the PBO is registered with the South African Revenue Service (SARS) and complies with section 18A of the Income Tax Act “by issuing a valid tax certificate for all donations received,” explained Snyman.
Medical aid contributions
Another area where taxpayers can reduce their income tax liability is through their medical aid contributions. “All individual taxpayers receive a monthly medical scheme contribution tax credit,” said Snyman.
In addition, taxpayers are also eligible to deduct a certain qualifying portion of out-of-pocket medical expenses incurred during the tax year.
Deductions for rental properties
There are also certain expenses that you can deduct from any income received from rental property. These include:
- The interest portion of your mortgage (if the property is mortgaged)
- Levies
- Rates and taxes
- Insurance premiums
- Rental agent’s commission
- Repairs and maintenance costs
- Bank charges
