How Can You Minimise the Tax that You Pay

In  other articles on Money 101 we have reviewed the taxes that SARS collect and what your obligations to SARS are. What you are probably more interested in is how can you actually try to minimise that tax that you pay. 

If we were to go back about 25 -30 years ago there were a number of tax schemes people became involved with and there were also many options for people to try to structure their tax more efficiently. Trusts were also the flavour of the day and thousands were being registered because, among other advantages, they offered tax advantages.

Unfortunately, owing to the abuse of these schemes and the blurring of what is tax avoidance (legal tax structuring) and tax evasion  (illegal no-paying of tax) SARS has either withdrawn a number of these  schemes and tax deductions or redefined what is allowable to limit their benefit.

So, what can you do?

Retirement Funding contributions

The first thing that we would recommend is to ensure that you maximised the tax deductions relating to contributions to retirement savings as far as you are able. 

You are able deduct up to 27.5% of your taxable income (or remuneration) up to maximum deduction of R350 000 p.a. as a contribution to retirement savings. So not only are you enjoying a tax reduction, but you are being prudent in providing for your retirement so that hopefully you can be part of the only 6% of South Africans who can actually retire financially.

Retirement funds comprise your pension and provident contributions which are generally your employment-based schemes, unless you are self-employed; but they also include contributions to retirement annuities (RAs). RAs are flexible in that you can contribute monthly amounts as well as lump sums making them a suitable vehicle to use for your tax planning.   

When you consider that, if your marginally tax rate 30%, each R100 contribution is effectively costing you R70 but the full R100 will grow until your retirement, this probably has to be your first option when considering ways to pay less tax. 

Tax Free Investment 

Since 1 March 2015 South Africans have had the option to invest R33 000 (increased in the 2021 tax year to R36 000) per annum in approved savings instruments tax free. The R36 000 per annum is further capped at R500 000 in your lifetime. 

The R500 000 lifetime contribution is cumulative meaning that if you withdraw amounts you cannot deduct these from the R500 000 lifetime contribution.  

All proceeds including interest, dividends and capital gains on the disposal of the investment are free from tax. 

When compared to other investment options available in the market, the tax-free investments have proved to definitively be one of the best options available.

Interest Exemption

Apart from the first two issues already discussed above, every taxpayer is allowed an annual deduction of up to R23 800 (R34 500 if you are older than 65) for any interest that they have received during the tax year. 

If you have exhausted the two options above (lucky you!), then you may want to consider investing an amount in an interest-bearing instrument that will generate interest up to this amount. 

Medical Scheme Credits

If you are the principal member or responsible for the contribution payments of a medical aid scheme, then you qualify for a monthly tax credit as follows:

As this is a tax credit i.e. a credit from the tax that you have to pay as opposed to a tax deduction that can be used in in determining the taxable amount before tax is calculated, the effect is greater. 

As this is a tax credit, if you are married it does not make a difference which spouse is the principal member.

Medical expenses deduction

Apart from the Medical Scheme Credits (MSC), you may also be able to claim a further deduction for medical costs according to the following formula

Deduction = {(7.5% x taxable income) – {(Medical aid contributions) – (MSC x4)} + other qualifying medical expenses} / 4

Or in words, so much of your medical aid contributions less 4 times the MSC that you claimed plus other qualifying medical expenses (OQME) that exceed 7.5% of your taxable income divided by 4. 

A practical example would be as follows:

Assume the following taxpayer situation

• Annual taxable income   R300 000
• Medical contributions R3 200/month or R38 400 per annum
• Principal member + 1 dependent so MSC = R664/month or R7 968 per annum
• Other qualifying medical expenses R50 000 (there was an incident during the year and while the medical paid 100% of the medical aid rate some specialists charged 300% of the rate as well there was a shortfall in the prescribed medicines)

In terms of the above formula the taxpayer could claim R8 482 as follows

7.5% x (taxable income) R300 000 = R22 500

Medical aid contributions (R38 300) – MSC x 4 (R7 968 x 4) + OQME (R50 000) = R56 428

R56 428 – 22 500 = R33 928

Divided by 4 = R8 482

Travel Allowance or Company Car

If you receive a travel allowance as part of your remuneration or are allowed a company car then it is highly recommended that you keep an accurate logbook of your business travel. 

If you receive a travel allowance you will probably be taxed on 80% of this amount; however, if you keep an accurate logbook and your business travel comprises more than 20% this additional amount me be claimed. 

If you receive a company car as part of your remuneration package, it is a fringe benefit that will be included in your taxable income and taxed accordingly. However, if you keep an accurate logbook you will be able to reduce the amount of the taxable benefit by the cost of your business travel. 

 Make a donation to a Public Benefit Organisation

Certain charitable enterprises are registered with SARS as a Public Benefit Organisation (PBO). Donations by a taxpayer to these enterprises are tax deductible up to 10% of your taxable income. On making a donation to a PBO, the PBO is required to issue you with a certificate acknowledging the donation which is will support your claim from SARS.

Commission Earning Taxpayers

If you earn commission and this amount constitutes more than 50% of your total earning then you are entitled to claim

• The costs that were incurred in earning that commission and
• Business travel

Typical costs that are incurred in earning commission include telephone and data costs, stationery, entertainment, the cost of any support employees etc. 

Trusts

I mentioned previously that Trusts used to be a popular vehicle for tax planning; however, this opportunity has been severely limited over the years by SARS to the point where Trusts are taxed at 45%- a rate significantly higher than individuals as well as companies. 

Trusts still fulfil a very useful role in the estate planning and other circumstances so they continue to be used. 

It is possible to avoid the Trust having to pay 45% on its earnings by applying what is known as the conduit principle to Trusts. All this means is that the income of the Trust is declared to its beneficiaries who then include it their taxable income and so it gets taxed at each beneficiaries marginal rate.    

In the application of the conduit principle the nature of the income is retained, so if the Trust had made a capital gain which it distributes to the beneficiaries the beneficiaries will declare that income as a capital gain in their tax returns.

It is apparent, as mentioned at the start of this article, that there are not too many opportunities for a taxpayer to reduce the amount of tax that they are required to pay to SARS. If you are disappointed by this situation remember

• What is worse than paying tax – not paying tax and
• The tax regime does not have to be fair – it just needs to collect enough revenue for the fiscus!