Hard workers at high risk of missing tax breaks – Imara

Hard-working salary- and commission-earners run a high risk of missing out on tax breaks at the end of the tax year, according to Imara Asset Management, South Africa, a wealth adviser to numerous corporate executives.

“The harder you work the softer you’re likely to be when it comes to tax planning,” says Lara Warburton, MD of Imara Asset Management SA.

“Every year, task-absorbed corporate heroes have the opportunity to seize tax savings designed to provide for retirement. Every year, many miss out.”

Typically, two types of high performer let the chance slip …

1. The workaholic manager: He or she achieves company goals by total focus on the job in hand. This 24/7 commitment results in haphazard or non-existent financial planning.

2. The commission kingpin: He or she earns big incentives. ‘Making target’ becomes an obsession, often to the exclusion of all else.

These go-getters miss tax savings running into tens of thousands of rands.

For instance, a hard worker on R480 000 a year may benefit from a company retirement plan, but fails to realise the tax advantages that accrue by simply taking out an additional retirement annuity (RA). The same diligent worker may benefit from incentive payments of R200 000 a year.

This staff member pays R36 000 a year into the corporate retirement fund (7.5% x R480 000) on which no tax is levied. This individual is also entitled to invest an additional R30 000 in an RA (15% x R200 000).

If no RA is taken out, annual tax of R187 270 becomes payable after rebates. But tax savings on the RA could reduce the tax bill to R175 270, a difference of R12 000. In effect, SARS ‘pays’ R12 000 toward your retirement.

Over 10 years, the additional tax breaks amount to R191 249 or R1 180 165 over 25 years.

A goal-setter earning commission of R700 000 a year with NO company retirement plan may make no retirement provision at all and at year-end would face a tax bill of R209 670 after rebates. That same commission-earner is entitled to put R105 000 a year into an RA (15% x R700 000), reducing the tax exposure to R167 670 – a R42 000 saving.

After 10 years, the SARS ‘contribution’ to the commission king’s retirement plan totals R669 371 (or R4 130 576 after 25 years).

Imara calculations assume the RA earns a 10% annual return.

“These are significant sums of money,” says Warburton. “They highlight a huge frustration for financial planners – the fact that most busy people work too hard to look after their wealth and that most hard workers are a soft touch for the taxman.”