Tax tips for the year-end and retirement savings

End of year Tax check list:

The current 2018/2019 tax year is ending on 28 February 2019. During this time, it is important to remember to make use of certain benefits for the year such as your annual deductions and exclusions:

  1. Contributions to a retirement annuity can be claimed as a tax deduction when filing your annual tax return. These contributions will be deducted against your annual taxable income for the year, and hence lower your taxable income and possibly result in a tax refund from SARS.
    • The deductible contribution is limited to the greater of 27.5% of your taxable income or remuneration for the tax year ending 28 February 2019. The maximum deduction that can be claimed in one year is R350,000.
    • Any contributions over and above the 27.5% or R350,000 maximum contribution can be utilised in future years (which is detailed in the section below)
  2. Top up your tax-free investment account into which you may invest up to R33,000 per tax year. All growth and interest in a tax-free investment is free of taxation when you withdraw the investment in the future
  3. Use your annual capital gains tax exclusion of R40,000. Consider making necessary investment switches or disposals, which will allow you to incur a capital gain of up to R40,000 without being liable for any tax on the gain.

Tax benefit when contributing towards retirement?

Allan Gray recently wrote an article summarising the five ways that investors can gain a tax benefit from contributing to their retirement funds.

  1. Reduce your tax bill in the current year

    Contributions to a retirement annuity can be claimed as a tax deduction when filing your annual tax return. These contributions will be deducted against your annual taxable income for the year, and hence lower your taxable income and possibly result in a tax refund from SARS.

  2. Reduce your tax bill in future years

    Contributing in excess of the maximum annual amount can benefit you in future years. This is because these excess contributions carry over to the following tax year and may reduce your taxable income during the next tax year, even if you don’t make any new contributions in that year. If you still make additional contributions in the next tax year, those contributions and the carry over amount from the previous tax year are added together and are subject to the 27.5% annual limit again, with any excess carrying over to the following tax year. Carry over can happen indefinitely throughout your lifetime.

  3. Reduce your tax bill when you withdraw or retire from a retirement fund

    If you choose to withdraw or take a lump sum when you retire or make a withdrawal from your retirement fund, this lump sum will be taxed as per the retirement tax tables. This tax table allows a R500,000 lump sum withdrawal before any tax is liable (assuming no previous withdrawals were made).
    Your tax-free lump sum can be increased by any contributions that you have made to the retirement fund, for which you have not yet claimed a tax deduction. These contributions are referred to as “excess contributions”.

  4. Get tax back from SARS on your living annuity income when you file your tax returns

    If you have “excess contributions” that you did not use as a lump sum withdrawal when you retired from your retirement funds, these excess contributions are still available to you when you receive your living annuity income and can reduce the taxable portion of your living annuity income.

  5. Reduce the tax bill on your death

    If you pass away and you still have not used your “excess contributions” in your retirement fund or living annuity, these contributions can be withdrawn by your beneficiaries without any tax being liable.

Summary

Don’t forget to top up your retirement funds to make use of your annual allowable tax deduction. You can also invest up to R33,000 into a tax-free investment per tax year.
Don’t feel that you need to limit your retirement contributions to your annual tax-deductible amount, as any excess contributions will still benefit you when you withdraw from your retirement fund, draw a living annuity income or the money passes to your beneficiaries upon your passing.

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