Tax doesn’t have to be taxing – a tax refund may be on the horizon
By Sharon Hamman
Right now, the cost-of-living crisis has forced South Africans to utilise every engine to help generate as much income as possible.
One of these engines revs up only once a year and sees South Africans filing their tax returns to see how much – if anything – the government owes them (for a change) in the form of a tax refund.
A tax refund is forthcoming when the tax you paid during the tax year exceeds the tax actually due and payable.
This will only happen if you incurred tax deductible expenses during the course of the year that was not been taken into account when your monthly tax was calculated by your employer.
By submitting a tax return, you will provide the necessary evidence of the expenses incurred and you can then enjoy the tax benefits as a result.
Tax filing season has just started, and for many it can be a season of receiving rather than giving – if they do it right. To have a chance of a tax refund, you have to go beyond an ‘auto assessment’, where the devil will generally hide in the detail.
Hence, many people do not even go there, sometimes at their own peril.
What you need is a dream team – a financial adviser to give you sound financial advice who is tax smart in an ailing economic landscape, and a tax practitioner to remove the devil from the detail when submitting your tax return.
1. Playing the long game with retirement savings
Why not get the taxman to help you meet your retirement planning goals? Once your financial adviser has determined what you need to save to provide for your retirement, you can save what you can afford in a tax-savvy way.
By investing in a retirement savings vehicle, like a pension/provident or retirement annuity fund, you will enjoy a tax benefit as the contributions are tax deductible within certain limits.
The logic is this – because you are saving to be able to retire comfortably and not become a burden on the state as a pensioner, the government will refund you a portion of your retirement contributions. If the contributions are facilitated by your employer, you may even enjoy the tax benefit during the course of the year, which increases your take-home pay.
Your financial adviser will be able to determine the maximum tax-deductible contribution you qualify for, depending on your remuneration and taxable income.
For example, if you qualify for a tax-deductible contribution of R30 000 per year (R2 500 per month) and your tax rate is 31%, your tax refund will be R8 100.
2. The taxman can make your medical scheme contributions more affordable
The South African Revenue Service (SARS) implemented a medical scheme contribution tax credit; a portion of your contributions is deducted from your overall tax liability (the total amount of tax you need to pay).
Called the ‘Medical Schemes Tax Credit’, you will be entitled to this benefit if you contribute to a medical scheme. The extent of the benefit depends on how many people are added as dependants on your medical scheme. The benefit is available to the principal member of the scheme and is based on a fixed monthly amount per dependant. SARS reviews this amount on an annual basis.
Where you have an employer-related medical scheme where your employer facilitates the contribution payment, the tax credits will generally be taken into account during the tax year when your monthly tax is calculated. In this case, you will not receive a refund at the end of the tax year as you have enjoyed the benefit during the tax year.
If you provide for your own medical scheme (it is not an employment-related benefit), you will enjoy the benefit of the tax credit when you are assessed.
Consult with a tax practitioner if you are not sure whether you should file a return for this reason.
3. Out-of-pocket medical expenses does not have to mean you are out of pocket
If you do not have a medical scheme and fund all your medical expenses yourself, or if you do have a medical scheme but not all your medical expenses incurred during the tax year were covered by your medical scheme or your gap cover, you may qualify for a tax deduction.
SARS provides for qualifying medical expenses you can claim a tax deduction for, if you paid for it out of your own pocket. A certain formula is used to determine the extent of the tax refund you will be entitled to, and it is dependent on your taxable income. It is important to remember that you might not qualify for a refund, but it might be worth your while to chat to a tax practitioner to make sure.
Your financial adviser can also assist you with advice on more cost-effective means to provide for large, unexpected medical expenses in the form of a medical scheme if you do not have one, or gap cover.
3. Working from your home office
Even if you are permanently employed, if you have been working from home sometime in the last tax year, you can claim for home office expenses. According to SARS, if you are an employee who works from home and has set aside a room to be occupied for the purpose of “trade,” you may deduct certain expenses incurred in maintaining that home office.
However, doing so comes with a few conditions, and it’s therefore critical to read the “fine print”. For example, your office must be in a dedicated space or room in your home and set up for the purposes of trade, and you must have performed more than 50% of your duties from this home office. Simply working at your dining room table or in your main bedroom at the dressing table will not cut it.
If more than 50% of your remuneration consists of commission or variable payments based on work performance, other requirements will apply to take advantage of this refund.
Consult with a tax practitioner to consider your personal circumstances and whether you qualify for this deduction and remember that claiming for a home office may come back to bite you in the form of Capital Gains Tax (CGT) when you decide to one day sell your home.
Make the refund count
You got the refund, now what? There is no right or wrong answer to this question, however, making wise financial decisions during your lifetime will benefit you in the long run.
Consult with your financial adviser to consider your options. There are many possibilities that can include adding it to your retirement savings to give it a much needed boost or settling debt, perhaps sending your child on that important school trip, or even making the decision to take that much needed holiday.
The process of making the decision is nearly more important than the decision itself – as you just have to be sure you are making an informed decision after all facts have been considered.
So, this tax season, remember, you don’t have to go it alone. Reach out to your dream team, get your documents in order, and make the most of the (refund) opportunities available to you. Your future self will thank you!
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