Tax deductions

End of tax year: Maximize your available tax deductions

As we head towards the end of the 2021/2022 tax year, now is the time to make sure you’ve taken advantage of the tax breaks available to you so you don’t leave “free money” on the table.

However, before implementing one or more of the commonly used strategies described below, keep in mind that tax planning should be part of the overall planning process and therefore should be approached strategically with a holistic view of the tax landscape. your entire portfolio.

Here are four ways to maximize your tax deductions for this year:

Supplementing your retirement pension

If you are contributing to a superannuation you have until 28 February 2022 to maximize your tax deductible contributions up to 27.5% of taxable income towards your RA, bearing in mind the annual maximum of R350 000. If you are also contributing to an occupational pension fund, remember that the tax deduction limit applies to the cumulative total of all your contributions to the pension fund. For example, if you invest 12% of your taxable income in your company’s pension fund, you can still invest up to 15.5% of your taxable income in your retirement pension, which is the most flexible vehicle. to supplement your retirement funding.

Unit trust retirement annuities are very flexible and customizable, making them ideal for ad hoc contributions, especially for those who earn irregular income, or who earn commissions and/or bonuses that are paid intermittently. They are also ideal funding structures for business owners who wish to wait until the end of the business year before finalizing their RA contribution level.

Remember that as an individual retirement fund, RAs offer complete flexibility when it comes to structuring contributions. While you can structure your investment bonuses to run as a monthly, quarterly, semi-annual or annual debit order, you can also choose to make one-time lump sum investments as your personal circumstances permit. As such, the weeks leading up to the end of the tax year should be used to determine the extent to which you are still able to take advantage of the tax deductibility of your RA contributions.

Your financial planner should be able to calculate exactly how much you have already contributed during the tax year based on your taxable earnings and the optimal amount to top up your RA. At the end of the tax year, your superannuation service provider will provide you with an IT3(f) tax certificate which is a summary of the details of all contributions you have made to an RA for the year, and this document will be submitted to Sars as part of your online declaration, serving as the basis for calculating your tax refund.

From a financial planning perspective, a great way to use the tax refund of your RA contributions is to reinvest the money, once again tax-free, into your RA in the coming year. next tax.

From a tax efficiency perspective, a retirement annuity undoubtedly offers the greatest benefits to investors because, not only are investment premiums tax deductible, but they are also tax exempt on dividends. and interest, and no CGT is payable on the growth earned. in investment, which has the effect of accelerating the growth of investment.

It is important to note that while you can access your RA funds earliest at age 55, there is no legal requirement to convert your RA to a mandatory annuity at any age. It is not until the time of your RA’s official retirement that you may be liable for tax if you make a lump sum withdrawal, although this depends on whether you have made previous withdrawals from your retirement funds and the amount that you want to remove. Retirement annuities are also effective when it comes to reducing taxes on death, as funds held in your RA are deemed not to belong to your deceased estate and are therefore not subject to inheritance tax.

If you do not already have a retirement pension and you have cash to invest, consider setting up an RA before the end of the 2021/2022 tax year in order to benefit from the tax declarations of the current year. Keep in mind that it takes a few days to complete the application forms and transfer the funds, so be sure to start the process as soon as possible.

Maximize your tax-free savings

Tax-Free Savings Accounts (TFSAs) also offer tax advantages to investors in that no taxes are paid on dividends and interest earned on the investment, and no capital gains taxes are paid. is paid on the growth of the investment or upon divestment. However, keep in mind that your TFSA contributions are made with after-tax money, which means you cannot claim a tax refund on your investment bonuses.

A distinct difference between RAs and TFSAs is that the underlying investment strategy of your TFSA is not subject to Regulation 28 of the Pension Funds Act, which currently limits equity exposure to 70% of its portfolio and foreign exposure at 30%. This means that as an investor you can take on significantly more investment risk in a TFSA structure well suited to a longer time horizon.

Currently, the legislation allows you to invest R36,000 a year in a tax-free savings account with a total lifetime contribution of R500,000. It is important to keep in mind that the tax advantages obtained by investing in a TFSA are not realized very early, the returns on investment and tax savings only becoming really significant after about ten years. Therefore, TFSAs actually make better long-term investment vehicles and can be used constructively to supplement your retirement savings.

Although you’re allowed to have as many TFSAs as you want, keeping tabs on your annual contributions can be a challenge. Remember that any contribution above the R36,000 per year limit will be subject to 40% tax, regardless of your personal tax rate, so it is advisable to stay within your investment limit.

Once you’ve maxed out your tax-deductible contributions to your RA, channeling the excess cash into a TFSA before the end of the tax year is a great option.

Use your CGT exemption wisely

If you are an individual investor, you can use your annual capital gains tax exemption, i.e. the first R40,000 of realized gains on your investment portfolio, to rebalance your portfolios if necessary. Although 40% of any gain triggered in a tax year is included in your taxable income, the annual exclusion can provide investors with the opportunity to review and possibly rebalance their investments to keep them aligned with their goals. and goals.

Often referred to as “shifting,” rebalancing actually means adjusting your portfolio’s asset allocation, if necessary, to ensure your investment strategy stays on track. When rebalancing your investment portfolio, keep in mind that your cost base will reset to a higher level, which, in turn, will reduce the gain if and when you sell trust units. in the future. Rebalancing can also occur when you choose to make additional contributions or withdrawals from your mutual fund portfolio.

Remember that if you are invested through a multi-manager, part of the function of the multi-manager is to rebalance your portfolio throughout the year, so it is important to check for other CGT events that have occurred in your portfolio during the tax year.

While some advisors recommend annual rebalancing, taking advantage of the CGT exemption shouldn’t be the only determining factor in your decision. If you are investing for the long term, a comprehensive annual review of your overall investment portfolio will reveal whether or not there is a need to rebalance and/or adjust your investment strategy. However, if you think your situation has changed, your goals have been recalibrated, or your investment strategy is too risky for your appetite, you may want to consider rebalancing your portfolio before the end of the tax year. .

Benefit from tax exemption for donations

If charitable donations are important to you, remember that the Income Tax Act provides exemptions for donations made to certain charities. Recognizing that many organizations are dependent on charitable donations from the South African public, Section 18A allows individuals to donate up to 10% of their taxable income to a licensed Public Benefit Organization (PBO) on a tax deductible basis. .

The key to benefiting from this tax deduction is, however, to ensure that you are donating to a PBO that is registered as such with Sars, bearing in mind that the tax exemption must be approved by the Sars Tax Exemption Unit (TEU). If you are unsure whether the charity you are donating to is registered as a PBO, you can ask them for proof that it is a registered institution under Section 18A.

If you are duly registered, you can request a Section 18A certificate from your PBO at the end of the tax year which will provide proof of your donations during the tax year when you file electronically. When requesting the Section 18A certificate, make sure it includes essential information, including the PBO reference number, date the gift was received, the name and address of the donor, and the amount or amount. nature of the gift.

If you have not yet made charitable donations in this tax year, you can do so by making a one-time contribution of up to 10% of your taxable income to a duly registered PBO. To make it easier for taxpayers, Sars has posted an up-to-date list of all PBOs approved under Section 18A on their website.