Make the most of your annual deductions
Time is running out if you want to make the most of the tax breaks to which you are entitled in the 2015/16 tax year. Paul Leonard, the Eastern Cape regional head at Citadel Wealth Management, says your financial planning to-do list for February should include the following:
Contribute to a retirement annuity (RA) fund. Check whether you can maximise your tax deductions by contributing to an RA, or topping up your contributions. If you are an employee who receives non-retirement-funding income, you can claim a tax deduction on up to 15 percent of this income that you invested in an RA, Leonard says. Non-retirement-funding income is excluded from the calculation on which your and your employer’s contributions to a pension or provident fund is based. It may include a travel (car) allowance or an annual bonus.
Invest in a tax-free savings account. Each tax year, you can invest up to R30 000 in a tax-free savings account, and you can contribute up to R500 000 over your lifetime.
Leonard says you will be investing after-tax money in a tax-free account, but the returns are free of income tax, dividends tax and capital gains tax (CGT), and you can withdraw your investment at any time.
Tax-free savings accounts are most suitable for long-term savers who have used up their tax deductions for retirement fund contributions.
Switch an investment over two years to minimise CGT. Leonard says that switching an investment can trigger CGT, depending on the type of vehicle in which you are invested. There is no CGT on investments in an RA, for example, and if you switch investments in an endowment policy, the CGT is paid by the life assurer on your behalf. But switch on a discretionary investment in, for example, unit trusts, may incur CGT.
Each year, you are entitled to an exemption of R30 000 on capital gains. If your gain will be greater than the annual CGT exemption, Leonard says it may make sense to do half of the switch in February and the other half in March. This will spread the capital gain over two tax years and enable you to make the most of your annual CGT exclusion.
Use your R1-million discretionary offshore allowance. If you have money to invest and want to invest it offshore, you can use your annual R1 million discretionary allowance. Leonard says you can do this without having to obtain tax clearance (you can send an additional R10 million a year if you obtain tax clearance), so a couple could send R2 million out of the country without applying for tax clearance.
Give gifts over two tax years to avoid donations tax. Leonard says you can give away R100 000 a year without having to pay donations tax, which is levied at 20 percent of any amount over R100 000. But a couple could donate R400 000 tax-free over February and March if each of them donated R100 000 in February and another R100 000 in March.
Don’t forget: if you receive a travel allowance and want to claim your business mileage, record your odometer reading on Monday, February 29.