As the chatter around suburban dinner tables and on social media increasingly focuses on the possibility of a tax revolt, Stephan Harztenberg, Head of Product Development at 10X Investments, suggests taxpayers look at alternative, hassle-free ways of reducing their tax bill
Recent talk of a tax revolt reflects frustration that taxpayers must foot the bill for our government’s failures, by way of higher VAT, higher marginal tax rates at the top, and ongoing bracket creep in the middle. Protest might seem more attractive, but there is another less onerous (and more patriotic) way to pay less tax.
There is no doubt that people are angry about money wasted on dysfunctional state-owned enterprises and lost to corruption, and for good reason.
In such circumstances, it seems perfectly reasonable for people ask why they should render onto Caesar more than is absolutely necessary.
As much as the idea of fighting back may sound righteous, given a belief that the situation seems to call for stern punitive action against the powers that be, quiet diplomacy can be extremely effective too.
The bottom line is: Make sure you have maxed out on tax incentives before considering tax evasion or a tax revolt.
Sars Commissioner Edward Kieswetter has admitted the problem, acknowledging that when public trust wanes, as we are experiencing now, taxpayers feel morally justified to withhold or manipulate their taxes.
The current “credibility deficit” had led to the increase in tax avoidance and fraud, which had cost the state billions of rand.
Fortunately for all of us, most taxpayers don’t have much agency in this regard, because they contribute mainly payroll taxes and VAT, neither of which can be withheld.
They do, however, have some legal (moral even) tools at their disposal, which include:
- Contributions to a medical aid (and if you have major medical expenses above a certain threshold)
- Donations to certain charities
- Investments in tax-free savings accounts
- Retirement fund contributions
Contributing to a retirement fund will reduce your take-home pay, but it is effectively moving your earnings (plus the tax you would have paid on them) to a different column on your personal balance sheet (your retirement savings). Importantly, you will get all the tax you have paid on these rands refunded when you file your return the following year.
How much you get back depends on your tax bracket. If you earn R20k per month, you fall into the marginal tax bracket of 26%, which means for every extra rand you earn, 26 cents goes to the state.
The good news is that this is the rate at which your refund will be returned for retirement contributions.
In this example, a R10k investment in a retirement fund will result in a R2,600 refund from Sars. In other words, your R10k investment cost you only R7,400. That’s a whopping return on investment by any measure.
There are limits, but they are fairly high. You can deduct total contributions to a pension, provident or retirement annuity fund up to 27.5% of your taxable income. The overall limit is R350,000 per annum.
In our example, the maximum deduction would be R66,000 (27.5% x R20k pm). Any excess contributions above the limit can be rolled over to the next tax year and deducted then.
It seems like a no-brainer to shift money from the taxman to your retirement savings. This is even more compelling if you look at recent retirement fund portfolio returns.
Returns of late have been better than most people think. The 10X High Equity Fund, for example, returned 11.2% in 2019, handsomely beating the 6.9% return on cash. Over 10 years, the 10X High Equity fund has delivered 11.2% pa, versus 6.2% for cash.
Not to mention that investment returns in a Retirement Annuity are not taxed, unlike other investments such as unit trusts and direct investments in shares and property.
Investing in the right retirement annuity, such as the 10X High Equity portfolio, which has delivered good long-term growth at a very low cost, coupled with the benefit of reducing your tax bill, remains an excellent long-term investment that won’t land you in trouble with the receiver.
Stephan is a director of 10X Index Fund Managers, a regulated manager of collective investment schemes. He is responsible for all of 10X’s financial products