Happy new tax year to you. May it be a frugal, sensible and thoughtful tax year for you and your families.
You may be thinking that the end of the last tax year was really hectic as you rushed to top up payments on various tax-free investments and retirement annuity contributions and evaluated your unrealised capital gains to see if it was worthwhile to harvest some of these.
Much of the running around in February occurs as a result of a failure to plan your tax affairs at the start of the year or to execute on your tax plan through the year. And so, as we stand at the entrance to the new tax year, here are some things that you can put in place right now to be more tax conscious throughout the year and avoid having to find capital at the last minute.
At the start is usually better than at the end
Research has shown that, for long-term investing, the longer capital is invested, the better the long-term returns will be. R1,000 invested at the start of every year will, due to the compounding effects of investing, inevitably lead to a better investment outcome than the same sum invested at the end of that same year.
Based on this principle, any capital you can invest at the start of the tax year is much more likely, over time, to do better for your outcomes than contributing at the end.
Solution: Pay your maximum contribution to your tax-free investment and retirement annuity fund at the start of the year.
Cash flow is king
In our years of providing financial planning advice to our clients, one of the biggest lessons we have learned is that it is inevitably easier, more effective and ultimately beneficial to make regular, ongoing payments toward your investments than to scratch around for generally unavailable capital just before the end of the tax year.
Solution: Set up a regular contribution to your tax-free investments and retirement annuity. You may look to make a top-up payment to your retirement annuity near the end of the tax year, but at least by then you are nearly fully funded and don’t have to pay too much in.
Tax-Free Investments
Tax-free Investments are brilliant investments! Every individual (you, your spouse, your children, grandchildren, godchildren, etc.) can contribute a maximum of R36,000 per tax year to a tax-free Investment and a total of R500,000 over their lifetime.
Investment income (interest and dividends) is earned and re-invested free of tax and capital growth is not taxable. All amounts withdrawn from a tax-free investment are free of tax.
It’s the proverbial “no-brainer”.
It is particularly ideal for individuals who have used up their tax allowances (such as interest exemptions or capital gains exclusion) or have exhausted their maximum tax-deductible contributions to a retirement fund.
Solution: Contribute the full annual limit of R36,000 to your tax free investments at the start of the tax year (now) or ensure that from this month you contribute R3,000 per month so that by the end of the tax year these investments are fully-funded.
Retirement annuities
A Retirement Annuity (“RA”) is a registered Fund in terms of the Pensions Fund Act, designed to invest and grow your retirement savings, in a tax efficient manner, the proceeds of which are only accessible after reaching retirement age on the fund (usually from 55-years old).
Your contributions to any Retirement Fund (your RA, Pension Fund or Provident Fund) qualify for a tax deduction. The annual deduction of these contributions from your taxable income is limited to 27.5% of your taxable income or gross remuneration (whichever is the higher) and subject to an annual limit of R350,000.00 per taxpayer (across all your retirement funds). Should your total contributions exceed this limit, then these will not qualify for a tax deduction in the current year of assessment and can be rolled over to the following year of assessment. All income and capital gains earned whilst invested in the RA are exempt from personal income tax.
Solution: Pay as much as you are likely to be able to contribute to your RA at the start of the year or set up as high as possible a regular contribution to your RA so that by the end of the tax year you only have a small top-up to do and do not need to find a large capital sum to contribute in order to maximise your tax deduction for the year.
What should you do?
If you don’t already have a tax-free investment or want to start a new tax-free investment for a spouse, child or other loved one, contact us now to put this in place. If you can fully fund these investments now, let us help you do so or let us set up (or increase) the monthly contributions so that the process is automated.
A similar path should be followed for your retirement annuity contributions. Let us help you to see what sum you can contribute now or let us set up a retirement annuity fund to supplement any company-sponsored fund you may have. Where you have an RA and are not sufficiently contributing to it, we can help you to maximise your contributions.
The earlier you start, the easier it becomes and the better the long-term outcomes.
Please get in touch with us and let’s put in place a plan.