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Paying My Taxes

How Do I Calculate My Tax

While many textbooks have been written on this topic we will only be able to give a high level overview of the process of determining how to calculate your tax. 

Tax Returns

The amount that a taxpayer is liable to pay SARS is largely determined by the tax return submitted by the taxpayer. SARS receives information from various sources about the taxpayer prior to the opening of the tax season and populates the taxpayers tax return with this information. 

When the tax season opens, and the taxpayer is able to access their tax return, they will see all of the information that SARS has already uploaded (IRP5s etc.). It is then for the taxpayer to confirm the information already submitted and to supply any other information that is not already captured on the tax return. 

What is Included

Residency 

South African’s tax system is based on residency so as a South African resident you are taxed on your worldwide income. If you are a non-resident you will only be taxed on your South African income. 

Marital Regime

Your marital regime will also have an impact on how you are taxed. If you are married in community of property you will be taxed on half of your interest, dividends, rental income and capital gain and half of the interest, dividends, rental income and capital gain of your spouse. This is regardless of in who’s name the assets are registered. 

If a spouse has received assets in terms of an inheritance or a donation which specified that these assets are not subject to the effects of any marital regime then they will be excluded from the above.

Process Overview

Determination Taxable income

While each taxpayer’s circumstances may be different, the purpose of the process outlined below is to give a general overview of the steps to follow to calculate the tax owing.  

Income  (will include)

  • Remuneration – including (from employment)
    • Fringe benefits
    • Allowances
    • Lump sum payments
  • Sole proprietor income (a side-line business or even your main business)
  • Investment income (dividends, interest – both local and foreign)
  • Capital Gains
  • Donations received
  • Deemed income
  • Income from Farming
  • Any income considered
    • Taxable
    • Non taxable

Less

Allowable deductions and exemptions

  • Interest exemption
  • Dividends received
  • Travel allowance 
  • Business travel
  • Retirement funding contributions
  • Donations to PBOs
  • Medical expenses
  • Wear and tear
  • Bad debts/doubtful debts

= Taxable Income

= Taxation (according to tax tables)

Less

  • Primary rebate
  • Medical Scheme Credits

= Tax payable to SARS.

It is important to note that a taxpayer is responsible for making a full disclosure on their tax return. 

So even where a taxpayer has earned income which will not be taxed e.g. interest of less than R23 800 the taxpayer is still required to declare the full amount of interest earned and to then deduct it in determining their taxable income.  

While an employer is responsible to correctly taxing the remuneration paid to an employee, the employee is still ultimately responsible for ensuring that their tax return is correct. The employer can only tax what they pay to an employee, they are not responsible for any deductions an employee may claim against that income e.g. travel allowances etc. 

If you receive income from multiply sources, you will be a provisional taxpayer. An employer will tax the employee at the rate applicable as if the employee only earned remuneration as they will not be aware of the details of the “other income sources” which will probably make this rate different to the final marginal rate applicable to the taxpayer. 

Supporting documentation

SARS is entitled to call for any documentation that supports the information in your tax return. Accordingly, it is very important that all figures captured in your tax return can be verified with adequate documentation. A failure to provide the requested documentation will result in deductions claims being disallowed. 

The failure to provide any requested information will also cast doubt on your entire return so there are consequential challenges. In a worst-case scenario SARS may even impose levies of 200% for additional assessments of tax they believe are due and payable. 

Retention of Records

 While individual taxpayers are required to keep all their tax information (including all supporting documentation) for a period of 5 years it is advisable to keep all records for a minimum period of 7 years. 

The retention of records refers to all physical items as well as data created by a computer, including data in an electronic form in which it was originally created or in which it is stored for back-up purposes. 

Paying My Taxes

How am I able to be Tax Compliant?

Over the past number of years, the importance of being tax compliant has become ever-more relevant. 

Certain professions are making it a pre-requisite for membership to their regulatory organisations and more and more financial transactions are requiring a positive tax compliance status.

These requirements are also mirrored in the corporate world with access to suppliers and especially tenders requiring the applicant to have their tax affairs in order.   

Requirements for tax compliance

To be tax compliant essentially requires that the taxpayer adheres to the following 3 obligations:

  • The that taxpayer is correctly registered for all taxes that are applicable to them
  • That all required returns have been submitted to SARS and
  • That the taxpayer does not have any outstanding debt with SARS. 

It is important to note that “all” returns are required to be submitted and not just “most” or the latest ones. 

If a taxpayer has an outstanding debt but has entered into a repayment plan which has been accepted by SARS, the taxpayer will still be considered as being compliant.  

Tax Compliance Certificate vs Tax Compliance Status

In the past SARS issued physical Tax Compliance Certificates (TCC) which, depending of the nature of the TCC, was valid for a certain period e.g. Good Standing was valid for 1 year, a TCC for a Tender was valid for 3 months etc. 

SARS have upgraded their systems and no longer issue a physical TCC. In its place they introduced a Tax Compliance Status (TCS). Under this system SARS issue the taxpayer a PIN which the Taxpayer may share with anyone who requires the TCS of the Taxpayer. 

Under this new system the person using the PIN will access the “live” status of the Taxpayer. This system avoids the scenario where a Taxpayer may have a TCC issued to them and they then do not submit returns or pay amounts due for the next year as their certificate issued is still valid.   

Type of Tax Compliance Statuses

SARS offers the following 4 versions of tax compliance Statuses (TCS)

  • Good standing 
  • Tender
  • Foreign Investment Allowance (FIA) and
  • Emigration

Good Standing 

The TCS for Good Standing is the general status used for a variety of requirements and no further documentation is required to be submitted on application. 

As mentioned above this TCS is the live status of the Taxpayer’s profile on SARS’ systems.

A taxpayer may access their eFiling profile with SARS and check on their TCS. Should they not be compliant the system will indicate the problem e.g. outstanding returns or an amount due.

Tender  

The TCS for  tenders is for companies having to comply with specific tender conditions. No additional information is required to be submitted to SARS as the PIN shared by the Taxpayer allows the company issuing the tender to access the live TCS of the Taxpayer.

Fixed Investment Allowance (FIA) TCS

When applying for TCS for a Foreign Investment Allowance the taxpayer has to submit additional documentation as follows:

  1. Relevant material that demonstrates the source of the capital to be invested. 
  2. Statement of assets and liabilities for the previous three tax years (this should include disclosure of all investments, loan accounts and distributions from local and foreign companies, trusts, etc.)
  3. Applicable Power of Attorney where the TCS application is submitted by a person other than the taxpayer.

With regard to point 1 the following documents regarding the source of the capital to be invested are required to be submitted

  • Loan: 
    Where the parent lends money to the child to invest offshore:
  • Loan agreement; and
  • Bank statement of parent, not older than 3 months.

The trust lends money to the trustee or beneficiary to invest offshore:

  • Loan agreement;
  • Bank statement of trustee or beneficiary, not older than 3 months;
  • Latest Trust Financials;
  • Three months bank statements of trust, not older than 3 months; or
  • Trust’s latest share portfolio statement (not older than 3 months). This statement will also include the number of shares and current market value.

The company lends money to a director of the company to invest offshore:

  • Loan agreement between the company and the director;
  • Bank statement of the director, not older than 3 months; and
  • Company’s latest annual financial statements.
  • Donation:
    If the donation is between spouses:
  • A declaration (IT144); and
  • Bank statement of donee, not older than 3 months

If the donation is not between spouses:

  • A Declaration (IT144)
  • Proof (Copy of the receipt) of donations tax paid; and
  • Bank statement of donor and donee, not older than 3 months.
  • Inheritance:
    • Letter from the executor of the estate;
    • A copy of the Liquidation & Distribution account; and
    • Bank statement, not older than 3 months.
  • Savings / Cash / Bank Account / Fixed Deposits:
    • Bank statement, not older than 3 months; and
    • Proof of source (i.e. where and how you obtained the money).
  • Shares:
    • Portfolio statement not older than 3 months. This statement will also include the number of shares and current market value.
  • Sale of property:
    • A copy of the transfer duty.
    • Original letter of the Conveyancer to confirm the transfer of the property and that the money will be transferred from the trust account; or
    • Proof of receipt of the proceeds together with applicant’s bank statement not older than 3 months.
  • Royalty Income:
    • Source of royalty income; and
    • Proof of royalty payment.
  • Earnings:
    • Where you have recurring foreign investments not exceeding R30 000 per annum a copy of a salary slip is needed once a year;
    • The policy number; and
    • It must be noted that the institution will apply on behalf of the taxpayer.
  • Distributions from a trust:
    • Resolutions from the Trust making the distributions;
    • Details of the source from the Trust making the distribution;
    • Bank statement of Trust, not older than 3 months; or
    • Trust’s latest share portfolio statement (not older than 3 months); this statement will also include the number of shares and current market value.
  • Other:
    • Documentary proof and explanation.

Emigration TCS

When applying for a TCS in respect of emigration the following documents are required to be submitted:

 Where the Taxpayer is for a first-time emigrant:

  • Statement of assets and liabilities for the previous three tax years (this should include disclosure of all investments, loan accounts and distributions from local and foreign companies, trusts, etc.)
  • A certified copy of the final application form ‘Request for settling in allowance” (MP336(b)) submitted to a foreign exchange dealer; or
  • Where the authorised dealer (e.g. bank) informed you not to complete the MP336(b), the authorised dealer must provide a letter stating the reason(s) why the MP336(b) should not be completed.
  • Applicable Power of Attorney where the TCS application is submitted by a person other than the taxpayer.
  • Capital Gains Tax calculation on the deemed disposal of assets on the day before the taxpayer cease to be a resident.
    • This is applicable where amounts are included under listed and unlisted investments as well as other assets (e.g. Kruger Coins).
    • Where the applicant is a member of a pension, provident or retirement annuity fund, the following particulars in respect of each fund must be submitted on a separate sheet:
      • Name of fund;
      • Expected lump sum amount to be paid out; and
      • Date of expected payment.
    • Where the applicant has a South African insurance policy, the following particulars in respect of each South African insurance policy the taxpayer own must be submitted on a separate sheet:
      • Name of insurance company;
      • Address of insurance company;
      • Policy number;
      • Date on which any benefits from the policy are expected; and
      • Particulars of expected future benefits from such policy.
    • Where the applicant, wife or minor children are beneficiary of a trust, the following particulars must be submitted on a separate sheet:
      • Name of the trust;
      • Income tax reference number of the trust;
      • Name(s) of the trustee(s);
      • Postal address of the trust;
      • Business address of the trust;
      • Nature of income received from the trust and the annual amount thereof;
      • Date on which you first received income from the trust;
      • Monthly or yearly amount received from the trust.
    • Where the applicant, spouse or minor children are the shareholder(s) of a private company or member(s) of a close corporation, the following particulars must be submitted on a separate sheet:
      • Name the private company/close corporation;
      • Income tax reference number of private company/close corporation;
      • Number of shares/percentage of interest;
      • Postal address of private company/close corporation; and
      • Business address of private company/close corporation.
    • In case of a family unit, if the spouse wishes to be issued with a separate TCS in order to formalise his/her emigration, then the spouse must do the following:
      • Complete a separate TCR01 – Tax Compliance Request form
      • Submit a certified copy of the final application form ‘Request for settling in allowance MP336(b) submitted to a foreign exchange dealer (NOT a copy of the MP336(b) submitted by the husband/life partner); and
  • Submit the supporting documents in support of her application. 

Note: The above will not apply where the family unit is emigrating together, and the details of the spouse are captured in the TCR01. In this event, the TCS for the applicant will include the details of the spouse (that is, names and tax reference number (if applicable)).

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Paying My Taxes

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:

Monthly tax credit Annual tax credit
Main member 332 3 984
Main member with 1 dependent 664 7 968
Main member with 2 dependents 888 10 656
Each additional dependent qualifies for a further tax credit 
of R224 per month

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!

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Paying My Taxes

What are my Tax Obligations?

In this article we review what your tax obligations are apart from the obvious responsibility of merely paying any relevant taxes applicable to you.  

Normal Tax

PAYE (Pay as You Earn)

While your employer is responsible for deducting PAYE from your earnings and paying this amount over to SARS you may also have obligations depending on your circumstances. 

At the end of the tax year (February) your employer must generate an IRP5 certificate which details your earnings as well as any PAYE that has been deducted. These IRP5 forms are submitted to SARS who then uploads them on your personal tax profile. When the tax season opens, and you access your tax return it will already be populated with the details of your IRP5 certificate/s. 

Should you earn more than R500 000 in a tax year you are required to submit a tax return to SARS. 

If your only source of income is remuneration (a salary) then all the tax return is effectively doing is confirming the information that SARS already has (from the IRP5 certificate).  

Should you earn less than R500 000 in a tax year then you do not have to submit a tax return provided ALL of the following criteria apply:

  • Your remuneration is paid from one employer or one source (you must file if you changed jobs during the tax year or have more than one employer or income source).
  •  You have no car or travel allowance, or company car fringe benefit, which is considered additional income.
  •  You do not have any other form of income, such as interest, rental income or extra money from a side business.
  • PAYE has been deducted or withheld.

If any of the above criteria do not apply, then you are required to submit a tax return. 

While the above criteria may not require you to submit a tax return, a taxpayer earning less than R500 000 may elect to submit a tax return should they have a need to claim medical expenses, retirement contributions or travel expenses (resulting in a refund of PAYE).

The tax return must be submitted during the “tax season” which is generally from July to December for people using SARS’ eFiling system or between August and October for those taxpayers manually filing their tax returns.

Provisional Taxpayers

As an employer is not deducting PAYE and paying this tax over to SARS on a monthly basis a Provisional taxpayer is required to submit 3 returns and make 2 and possibly 3 payments to SARS relating to the tax year. This process ensures

  1. That SARS received some revenue from Provisional taxpayers during the tax year instead of having to wait until the tax year has ended and
  2. It mitigates (to some degree) the potential risk of a provisional taxpayer having to make a single large tax payment at the year end that may cause liquidity challenges. 

The tax year for Provisional Taxpayers generally runs from 1 March to 28 February. 

A provisional taxpayer is required to submit a provisional tax estimate (an IRP6) for the period 1 March to 31 August on or before the 31 August. This is a forward-looking estimate as the taxpayer needs to estimate their income for the 12 months ending 28 February. In so doing there are certain rules that the taxpayer must apply

Having estimated their income for the 12 months, on or before the 31 August, the taxpayer is required to make a payment to SARS for this first period as follows:

  • Half of the total estimated tax for the full year;
  • Less the employees’ tax paid for this period (6 months);
  • Less any allowable foreign tax credits for this period (6 months).

A Provisional taxpayer is then required to follow a similar process at the 28 February for the second period (1 September – 28 February). This second estimate; however, is now backwards looking as the taxpayer should have a very good idea of what they have earned for the 12-month period ending 28 February. Again, an IRP6 is required to be submitted for this period.

Having determined their income for the 12 months the Provisional taxpayer is required to make a payment for this second period as follows:

  • The total estimated tax for the full year;
  • Less the employees tax paid for the full year;
  • Less any allowable foreign tax credits for the full year;
  • Less the amount paid for the first provisional period.

There may be circumstances where the taxpayer was not able to accurately estimate their earnings for the 12 months ending on the 28 February in their second IRP6 submission which had to be submitted by the 28 February. In these cases, the Provisional taxpayer may elect to submit a third IRP6; however, this must be done within 6 months of the year end i.e. 31 August. The payment related to this third IRP6 will be calculated as follows:

  • The total tax estimated payable for the full year;
  • Less the employees tax paid for the full year;
  • Less any allowable foreign tax credits for the full year;
  • Less the amount paid for the 1st and 2nd provisional tax periods.

By submitting this third IRP6 and making the related payment, a Provisional Taxpayer may avoid being charged interest for the late payment of tax.  

Provisional tax payments are non-refundable.

Apart from submitting the 2 (or 3) IRP6’s for the tax year, all Provisional taxpayers are required to submit a tax return (usually by 31 January – 9 months after the tax year end).

It is important that Provisional returns and payments are made on the due dates as SARS imposes rather severe penalties on late payments and submissions – typically 20% of the tax liability. If an IRP6 is submitted more than 4 months after the due date SARS will consider it a nil return and penalise you based on this scenario.

 Capital Gains Tax

Should you have disposed of immovable property during the tax year it is likely that you would have made a capital gain or a loss. The details of this capital gain or loss must be declared on your tax return.   

Sole Proprietors and “Side-line Businesses”

If you operate a business as a sole proprietor or run a side-line business to generate extra income, then the details of that business need to be included in your tax return. You will need to register as a Provisional taxpayer and include this income under the “Local Business, Trade and Professional Income, section”.  

You are required to register your sole proprietor business with SARS who will allocate a tax reference number.  The income and expenses of this business are effectively ring-fenced; however, the resultant profit or loss is included in the assessment of your personal tax and taxed at the applicable personal rates. It is important that you maintain accurate records of all the income and expenditure related to your business. 

Donations Tax

Should you make a donation that is subject to tax then that Donations tax is payable by the end of month following the month in which the donation takes effect. This is done by filling in an IT144 (a standard SARS form) and paying the amount due at your nearest SARS branch or via eFiling if you are registered. 

The Donations tax threshold of R100 000 is cumulative and so if you have made several donations during the year you will need to keep track of the total amount and pay for any amounts over the R100 000 (at 20%). 

If you are the recipient of a donation it is not taxable in your hands; however, you will need to declare the receipt of this donation under the “Amount considered Non-taxable”. Be aware though that if the Donor fails to pay the Donations tax when it is due the donee becomes jointly responsible for the Donation tax payable. While this may be an awkward conversation, should you be the recipient of a donation you should confirm that the donation tax has been paid.

Conclusion

While we have shown in other articles that there are a number of taxes which SARS collect, most of these are the responsibility of third parties e.g. manufacturers and suppliers or even the Executor of your estate. The taxes above are the ones that you ned to ensure that you have personally paid.   

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