Get a bigger chunk back from the taxman

Tristan Naidoo, Legal Advisor at Old Mutual.

Your best defence against the VAT increase is to become tax savvy.

South African consumers will soon be paying more value-added tax (VAT), following the announcement by the Finance Minister in his Budget Speech that VAT would be increased from 14% to 15% on 1 April. While taxes remain the government’s biggest source of revenue and higher taxes assist the government to manage the country’s fiscal standing and drive all-important growth, increased taxes place additional strain on consumer wallets.

Tristan Naidoo, Legal Advisor at Old Mutual, urges consumers to become more tax savvy to ease the impact of the VAT increase.

Naidoo points out that while the deadline for filing your income tax returns is only towards the end of 2018, getting into good tax habits early on is a must to make the most of concessions and benefits. “Knowing what you can claim for will help you to prepare accordingly – such as keeping the correct slips or invoices and knowing the tax-free limits on savings vehicles,” he says.

“Understanding how your investments are taxed is critical,” he emphasises. “Government is serious about improving the saving habits of South Africans. So they incentivise us by building in tax benefits to both medium and longer-term savings vehicles.”
“You need to consider the way these medium and long-term solutions are taxed as they can ultimately help you achieve your financial goals – specifically, how you plan to live after you retire one day,” says Naidoo.

He explains that in the short to medium term, it is important to look at savings vehicles with more flexibility – but which are still taxed efficiently. “Tax-Free Savings Accounts (TFSAs) are a perfect example of this,” says Naidoo. “They offer tax-free growth on capital and also no tax on withdrawals – which gives you flexibility.” Limits do apply, however, so he says it is best to speak with a professional financial adviser to make sure you are staying within the tax-free limits. Naidoo explains that you are allowed to contribute up to R33 000 per individual per year, or up to R500 000 over a lifetime.

On long-term savings, specifically for retirement, Naidoo says that one of the most tax efficient savings vehicles is a Retirement Annuity (RA). While RAs offer limited liquidity, Naidoo points out that the tax concessions on contributions are a huge benefit for retirement savers.

“You can save up to 27.5% of the greater of remuneration or taxable income – capped at R350 000 per year – on contributions made to pension, provident and retirement annuity funds,” he says. “Government is effectively rewarding you for investing in your retirement with a literal cashback through a tax refund at the end of the tax year.” In addition, growth on your contributions while in the fund is not taxed. A financial adviser should be consulted to advise you on the tax implications relevant to regular investments.

Naidoo adds that while many people make their last-minute RA contributions at the beginning of the year, it is important to keep track of the thresholds by incorporating them into a broader financial plan. “Planning your retirement contributions and incorporating these into your annual budget is a key element in holistic financial planning,” he explains. “A good financial adviser will assist in this process, to ensure that your savings are working hard for your future benefit.”

He emphasises that with careful planning, you will have an idea of the tax refund you can expect to receive after you’ve filed your tax returns later in the year. These amounts can be ploughed back into your tax-free savings account or RA – for next year’s tax benefits.

When it comes to saving for retirement, Naidoo believes that far too few South Africans are adequately preparing for retirement. “Consistently saving towards retirement, including using tax concessions and refunds as additional contributions, will help you stay on track to achieve your retirement goals. Every little bit counts when it comes to protecting your future income.”