As an individual, you probably pay more to the government than you realise. It's to your advantage to know about the different types of taxes, as you can then look at ways to pay less tax or, as the financial planning experts say, become more "tax efficient".
Note that finding ways to reduce tax should not be confused with avoiding paying taxes that are rightfully due – that is against the law.
To paraphrase a well-known poem, "How does the government tax thee? Let me count the ways."
If you earn an income, you must pay tax on that income, whether it is in the form of a salary, commission, pension income, or earnings from investments or rental property (taxes on investments are discussed separately below). Against what you earn in a tax year, you may deduct expenses incurred in producing that income – such as maintenance expenses on a rental property.
You can also deduct contributions to a retirement fund and donations to designated charities. For the 2020/21 tax year, if you are younger than 65 years of age and your annual taxable income (gross income minus deductions) is below the threshold of R83 100, you do not pay tax.
If you are 65 or older, the tax threshold is R128 650, and if you are 75 or older, the threshold is R143 850.
Income tax in South Africa is a so-called progressive tax. You pay a higher rate the more you earn. The percentage goes up in increments, according to the marginal tax brackets. You pay less tax on the first R1 000 you earn than you do on your last R1 000.
You are then eligible for rebates, depending on your age and in line with the tax thresholds mentioned above, and medical tax credits, to offset some of your medical expenses.
TAXES ON INVESTMENTS
There are three taxes on investments:
1. Tax on interest. Interest on bank accounts and interest-bearing investments must be added to your income and taxed as such. However, the first R23 800 is tax-free, which rises to R34 500 if you are aged 65 or older.
2. Withholding tax on dividends. Company dividends to shareholders are taxed at 20%. The tax comes off before you receive the dividend – it is not up to you to pay it. It applies to direct investments in shares and investments such as unit trusts in which the underlying assets are shares (equities).
3. Capital gains tax. This applies to assets that increase in value, such as shares in companies and property. You pay tax on the gain in value of the asset between its value when you bought it and its value when you sell it. (Note that the tax is only triggered when you sell.) A portion of the gain (40%) must be added to your taxable income, although the first R40 000 is excluded. There are higher exclusions on residential property and the sale of assets on your death.
Tax-free savings accounts and retirement savings are exempt from these three taxes.
VALUE ADDED TAX
On virtually everything you buy, from groceries to services, 15% goes to the government in the form of VAT. The tax applies at each step in the value chain, from raw materials to finished goods – hence the name. Some basic foodstuffs such as bread and milk are exempt from VAT (they will have an asterisk on your supermarket slip).
If you give money or a gift to another person or company, you, the donor, are taxed on that gift at 20%. If you are ultra-wealthy and the gift is more than R30 million, the rate is 25%. However, you are allowed to give money/gifts worth up to R100 000 each year without paying tax, and gifts or donations to a spouse are exempt.
You pay transfer duty on the transfer of a property into your name. This progressive tax starts at zero for properties with a value of R1 million or less. For the 2020/2021 tax year, on a property of R2 million you would pay about R45 000. However, on a property of R2.5 million, just half a million more, the transfer duty doubles to about R90 000.
This is a tax on your estate when you die: 20% on estates of up to R30 million, and 25% on anything above that. If your estate is worth less than R3.5 million, you don’t pay anything, and this amount can “roll-over” to your spouse when you die, so that your spouse will not pay anything on an estate of less than R7 million.
Aside from all these taxes, you also pay duties of varying amounts on imported goods, petrol, and alcohol and tobacco products, among others.
THE OCTOBER DIGI MAG
In the October edition of MONEY, the focus is on a subject people prefer not to think about. No, not death, but something just as unavoidable: taxes.
South Africans are in the middle of the 2019/20 tax filing season, with returns for non-provisional taxpayers due by October 22, for those who need to go to Sars branches, and by November 19 if they are filing electronically.
The magazine provides tips from experts on filing your return and on where you can save on tax.
It also provides the income tax tables for the 2020/21 tax year and contact details of the Tax Ombud, among other ombudsmen to whom you have recourse for financial complaints. Read it free at HERE!