It’s that time of the year again: tax return season. Between July and the end of the year, taxpayers should complete their tax forms and submit them to the South African Revenue Service (SARS)…
For the average income-earner, it’s quite a simple process and one definitely worth doing. “You should submit a return because there’s a good chance you’ll get some money back from the Receiver,” explains Stephan Hartzenberg, product architect at 10X Investments. “This is particularly true if you’ve put some additional money towards your retirement during the tax period of 1 March 2018 to 28 February 2019.”
This benefit reflects the acknowledgement by the State of people who have taken steps to cater for their financial well-being during their retirement years. If you save for retirement through those retirement savings products recognised by the State for these purposes – like retirement annuities – you may qualify for a refund on your tax from the State.
Hartzenberg explains that a refund on tax paid during the year (as PAYE deducted from your monthly salary) is available for 27.5% of a taxpayer’s taxable income (up to a maximum of R350 000 per tax year).
So, if your annual income is, say, R400 000 per annum and you contribute R36 000 to your pension fund, you will be taxed on only R364 000 (R400 000 LESS the R36 000 contributed towards your retirement), effectively saving you R11 160 in tax. That means your R36 000 investment only cost you R 24 840 in take home pay. When compared to discretionary savings this is a 45% return, even before any investment growth.
It gets better if you’re contributing towards retirement
“But, you can make things even better if you contribute more to a retirement annuity or add funds into your pension fund,” according to Hartzenberg. “Say you save an additional R2 000 per month by way of a debit order into a retirement annuity, that means that your taxable income for the year will drop to R340 000 – the R24 000 saved into the retirement annuity is deducted from the R364 000, saving you an additional R7 440.”
Your total invested amount for the year of R60 000 has only cost you R 41 400; effectively, SARS funded the R18 600. By reinvesting any retirement related refund every year, retirement funds become the gift that keeps on giving.
Lump sum payments into a retirement annuity will have the same effect
So, if you are due a refund from SARS this year after submitting your tax return, consider saving the refund amount in your retirement annuity. That way, your taxable income for the next tax year will be reduced.
“It’s not a difficult thing to do,” Hartzenberg says. “A tax refund is not usually money you would have been expecting to receive, so don’t be tempted to spend it on things that you weren’t even planning on buying and don’t max out the credit card in anticipation of a refund. Instead, invest it in your retirement annuity and you’ll get another tax benefit in the following tax year. Plus, if you leave the funds in the retirement annuity for many years, you will benefit from the effects of compounding: that is, the growth on the growth in your investment that takes place the longer you leave savings in the savings vehicle.”
So, bear this in mind when you submit your income tax return over the next few months. Closing dates for submitting returns are the end of October for branch filing and 4 December for eFiling. If a refund of tax comes through to you, save it wisely!