We answer your tax questions

There is no reason to be uncertain about taxes. City Press answers readers’ money questions.

1. How do I avoid taxes on my retirement?

Q: I am almost 60, I am single with no dependants. I retire in three years. I have a pension and no debt. Recently I had a tax-free investment payout of just under R50 000. How do I prepare for retirement by avoiding all unnecessary taxes and costs?

A: The best way to avoid tax is to wait until retirement. On retirement you are able to take up to R500 000 tax free. Depending on your retirement fund structure you will either be limited to taking one-third of your retirement benefit as a lump sum (pension fund) or you can take the full amount (provident fund). In the case of a provident fund, any amount above R500 000 will be taxed unless you transfer it to an annuity such as a life/guaranteed annuity or living annuity. Although the capital would not be taxed if you transfer to an annuity, the income you receive from those annuities will be taxable. The most important decision will be in choosing your financial adviser. It is important to find a financial planner now, before you retire, so that you can prepare properly for retirement. As you want to minimise product costs in retirement, there are financial planners who work on a fee or retainer basis rather than charging a percentage of your investment. In terms of the R50 000 you recently received, you need to decide what you want to do with it. If you need it in the short term, you can invest in a bank investment. As long as you do not earn more than R23 800 in interest you will not pay tax. If you are looking for a longer-term investment, then it is worth investing R33 000 into a tax-free savings account, which you can add to each year.

2. How can I be more tax efficient?

Q: I need help in reducing the tax payable on my investments, which are mostly cash in the form of fixed deposits ranging from short to medium term. I find it very strange that I still have to pay tax on the money invested in commercial banks. My financial situation is good, I took early retirement and am 52 years old. I have an adequate monthly pension which increases each year and includes medical aid. My children are all independent and I have more than enough cash reserves/petty cash/ emergency fund. How can I be more tax efficient?

A: On a positive note, you know you are financially sound when you have a tax problem! Any income is taxable, whether that is a salary, interest (including from a bank) or rental. You also pay tax when you sell an asset for more than you paid for it (capital gain). In order to pay less tax, you need to look at diversifying your investments across various assets as well as using tax efficient products. A warning, however, is to watch out for paying higher fees to pay less tax because often the tax benefit is offset by higher fees. It would be worth consulting with a financial planner, ideally one who charges for time rather than taking a fee on the product.

A few things to consider:

• Income tax on interest: Any interest earned on your investment is included in your gross income for that tax year, even if you have reinvested the interest. You do however qualify for an interest exemption, so you will not pay income tax on the first R23 800 of interest earned if you are under the age of 65, or R34 500 if you are over 65. Depending on your interest rate you could invest up to around R450 000 before you pay tax.
• Diversify into equities: You could invest in shares or an investment portfolio that invests in equities (shares generally listed on the JSE). This can be more tax efficient than earning interest as your returns are made up of capital gain and dividends. The other advantage of investing in equities is that over time it tends to outperform cash and would be preferable if you plan on leaving the money invested for more than five years. The downside is that the value of equities/shares can fall in the short term, so it is only for money that you can leave untouched for five years.
• Dividend tax: Dividend tax on any dividends you receive. Dividend withholding tax (DWT) is levied at 20% of the dividends earned and is paid by the company that declares the dividend directly to the Receiver of Revenue so it is not added to your taxable earnings, unlike interest income.
• Capital gains tax: Capital gains tax (CGT) is only paid when you sell the investment. CGT is calculated on the growth between what you paid compared with the price you sold. The inclusion rate for capital gains tax is 40% and the first R40 000 of capital gains is exempt from tax. What this means is that 40% of your profit above R40 000 is taxable at your marginal tax rate. For example, you bought shares for R100 000 and sold them for R300 000 giving you a profit of R200 000. You deduct the R40 000 exemption leaving you with R160 000. Forty percent (R64 000) is taxable at your marginal tax rate. If your marginal tax rate is 30% then you would pay R19 200 tax on R200 000 profit.
• A tax-free savings account (TFSA): You pay no tax (no interest, dividend or capital gains tax) on any investment that is housed in a tax-free savings account. The problem is that you can only contribute R33 000 per annum to a TFSA to benefit from the tax exemption. But it is worth using that facility and adding to it each year. You could also open an account in your spouse’s name.
• Retirement annuity: If there is a portion of the money that you do not need to access, or earn an income from, you could consider a retirement annuity (RA). This may sound strange to a retired person, but there is no age restriction on taking out a retirement annuity. There is no tax payable on the growth of the investment and your contributions are tax deductible from any income you receive. You could select retirement age as 65 at which time your tax rate will reduce as per the tax tables which are more favourable to people 65 years and older. At that stage you could withdraw one-third of the investment and receive an income from the remaining two-thirds. You need to make sure you select the most cost-effective retirement annuity, a maximum of 1% fee per annum, otherwise the tax benefit gets used up in fees.
• Living annuity: As you are retired you could invest in a living annuity. This is an investment specifically designed to provide income in retirement. The advantage is that like an RA there is no tax inside the investment, but you do pay tax on the income you withdraw each month. However, you only have to draw up to 2.5% per annum, so this helps if you do not need the full income. Again, be careful about fees as living annuities can be expensive.
• Endowment policies: These can be attractive if your tax rate is above 28% as it is taxed at the company rate within the fund and paid out after tax. However, if this is higher than your current tax rate, that may not be worthwhile. These products also tend to attract high fees.

3. Will my tax increase?

Q: My payslip shows that I receive a travel allowance, yet I take few business trips – if any. I have the option to remove it and have a “clean pay” situation. What will be the effect on my net salary if I opt for “clean pay”? Will my tax increase?

Rob cooper, tax expert and director of legislation at Sage, responds:

The taxation of travel allowances is a difficult matter that is made more complex because there are two sets of rules. The first set of rules instructs employers and payroll systems how to tax travel allowances. If the employee’s business travel is estimated to be less than 80% of the total travel (personal plus business travel) for the tax year, 80% of the travel allowance amount is remuneration, which is subject to pay-as-you-earn tax (PAYE), the skills development levy and Unemployment Insurance Fund contributions. The second set of rules relates to the final calculation of income tax on assessment at the end of the year. The actual business travel value is determined by a logbook declared by the employee in the ITR12 annual return. From this, the SA Revenue Service (Sars) determines the final proportion of business travel (nontaxable) and personal travel (taxable). The implication of the second set of rules is what is most important for the employee – this is the final amount of tax. If the employee does not travel at all for business purposes, it is illegal to be paid a travel allowance and it must be stopped. If the employee is required to travel for business purposes, it is quite in order that the employer compensates the employee for using a privately owned vehicle for business purposes. However, the value of the travel allowance must be in line with the expected value of the business travel. Very little business travel must result in a low value travel allowance. Remember that, if a travel allowance is paid, the employee must record business travel every day in a logbook, and submit that to Sars in the ITR12 form at the end of the year. If a logbook is not submitted, the full amount of the travel allowance that was not taxed during the year in the payroll will be taxed on assessment. While this is not a certainty, it could raise questions at Sars about why the employer is paying travel allowances that are not substantiated by a logbook of business travel. If the travel allowance (of which 80% or 20% is taxed in the payroll during the year) is replaced by a salary (100% taxed), your net pay during the year will be reduced by the additional PAYE. However, if there is no logbook or record of business travel, whatever was not taxed in the payroll will be taxed on assessment. Your final net position after income tax will therefore be the same. Cooper advises that, if you don’t travel for business purposes, you should do away with your travel allowance. You will sleep easier at night, and so will your employer.