Illustration: Mangena

Who knows what this week’s Budget will bring in the form of higher taxes? Although you can’t do much about what you’ll be paying the taxman in the future, you can at least make the most of the tax breaks available to you before the current tax year ends in 11 days’ time.

There are a number of things you can do. Some of these may take three or four days to process, so your time is limited.

1. Top up your contributions to your pension fund or retirement annuity (RA) fund. 

Tandisizwe Mahlutshana, the executive of marketing at PPS Investments, says since the 2016/17 tax year the South African Revenue Service (Sars) has allowed you to invest up to 27.5% of your annual income in retirement funds, up to R350 000, and claim back the contribution on your tax return. The contribution includes your employer’s contribution to your pension fund, which is regarded as part of your income.

Mahlutshana says you can take advantage of this concession if you move quickly before February 28. 

“You should take a look at your annual salary, calculate the percentage you have already paid into your retirement fund and/or RA for the current tax year, and make a lump-sum contribution to get as close to the 27.5% mark as possible.” This is easiest to do in a unit trust RA, which is highly flexible regarding contributions.

Contractual RAs offered by life assurers and employer-sponsored pension funds are typically less flexible when it comes to making a lump-sum payment over and above your regular contributions. 

Neither retirement funds nor tax-free savings accounts (see below) are subject to capital gains tax (CGT), dividends tax (at 20% on discretionary investments) or tax on interest income.

2. Top up your contributions to a tax-free savings account. 

Another investment vehicle that every South African should take advantage of, Mahlutshana says, is a tax-free savings account. 

“As with a retirement fund, there is zero tax on investment income or growth. You can invest up to R33 000 a year until you reach the lifetime limit of R500 000, and it is one of the best ways to boost your nest egg.”

If you are saving in a tax-free investment, either for yourself or on behalf of a minor child, you can top up the annual contribution per person to R33 000. 

This means that a family of four could be saving up to R132 000 a year in such vehicles. However, be aware that Sars will tax heavily, at 40%, anything over the annual contribution limit.

David Chard, the head of life and invest at PSG Wealth, says the end of the tax year in February often sees something of a scramble, as everyone pushes to apply for tax-free savings investments ahead of the deadline. 

He says that, apart from the tax-free accounts offered by the banks, you can invest in a range of unit trust-based investments across asset classes that include offshore funds.

One thing you cannot do, Chard says, is convert an existing investment to a tax-free investment, even if the underlying assets are the same. You will have to close your existing investment and reinvest. 

Transfers between existing tax-free investments are also not allowed, although this condition is expected to be relaxed in the near future.

3. Take advantage of your CGT exclusion. 

CGT kicks in only when you realise a gain – in other words, when you cash in an investment in which there has been a capital gain, or when you switch out of such an investment into another. This applies particularly to equity unit trust funds. 

So if you are rebalancing or “de-risking” your portfolio by moving, say, from a high-risk high-equity fund into a less risky medium- or low-equity fund, you can stagger your transfer between funds over several years, making use each year of the annual exclusion, which, for the tax year that ends on February 28, is R40 000.

4. Make full use of donation exemptions. 

Donations to your spouse are tax-free. To anyone else you are allowed to make a tax-free donation of up to R100 000 per person per year. Above that you are taxed at 20%.

So if you haven’t already done so, this is an ideal time to contribute to a child’s or a grandchild’s savings, perhaps for his or her education, of which R33 000 could be into a tax-free savings account. You will also lower the value of your estate for estate duty purposes.

You can also, before February 28, make use of the tax break on donations to public benefit organisations, such as charities. These are tax-deductible on up to 10% of your taxable income before medical expenses (excluding retirement fund lump sums and severance benefits).

5. Venture into venture capital investments. 

For high-net-worth individuals who have cash to spare and can stomach a high level of risk, there is a tax deduction for investments in local venture capital companies. Section 12J of the Income Tax Act allows you to deduct from your taxable income 100% of an investment into a venture capital company that provides funding to small and medium-sized South African businesses.

There are about 90 section 12J venture capital companies registered in South Africa. The minimum investment amount varies but is typically about R500 000, which must be invested for at least five years, or the tax benefit is forfeited. Any gains are subject to CGT. 

Private equity investments are typically higher risk than listed equities and collective investments. 

Ian Groenewald, the chief executive of one of these companies, TBI, says the 12J initiative is much needed in South Africa, spurring economic growth and job creation. 

He says that although the companies have an obligation to manage investment risk, he encourages investors to do thorough due diligence checks before considering an investment.


DIFFERENCES BETWEEN AN RA AND A TAX-FREE ACCOUNT

Carla Rossouw, tax manager at Allan Gray, says the main differences between retirement annuities (RAs) and tax-free investments are:

• Retirement funds offer tax savings now. You pay less tax now because you make contributions with earnings on which you have not paid tax, but you will pay tax later when you exit the fund. In other words, you defer paying tax. In return, there are rigid legal restrictions on withdrawing your money.

• Tax-free savings investments offer lower tax savings and are capped at a lower contribution amount but are less restrictive – they allow you to take your money out at any time.

“RAs in most cases offer the best tax benefits, but they come with the most onerous conditions,” Rossouw says. “In addition to your contributions being tax-deductible (see main article), there is no tax on investment returns (interest, dividends and capital gains) while in the product. However, you are taxed on exit (when you withdraw money, retire or die), although the first R500 000 of your one-third cash lump sum is tax-free.” 

The drawbacks are that you do not have access to your savings before the age of 55, and your investments are constrained by regulation 28 of the Pension Funds Act, which stipulates the maximum exposure you can have to certain asset classes.

By comparison, with tax-free investments, contributions are not tax-deductible. However, like RAs, there is no tax on interest, dividends or capital gains. “You can access your money at any time, although you are not able to replace what you have withdrawn, and you must be aware of contribution limits and associated penalties,” Rossouw says.