15 Legal Ways to Reduce Taxes

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NOTE: Some of these are no longer applicable based on the 2021 Budget speech. Contact [email protected] for more information.

South Africa: Times are tough. Money saving strategies must be taken seriously. I provide fifteen actionable tips to reduce your tax. Some seen before, others often overlooked. If you do the first step, you will accomplish all fifteen. Be smart.

  1. Focus on making more money.
    • Let your Certified Financial Planner (CFP) worry about minimizing your tax.
    • Many Certified Financial Planners are authorized tax practitioners.
    • They have the benefit of having a holistic view of your finances.
    • Need a CFP? We will allocate one to you at Virtual Adviser. Click here to contact us.
  2. Maximize your retirement contributions.
    • Retirement contributions are tax deductible to a limit
      • …make sure you know how to use use them.
    • Example. My client, a doctor, is receiving local interest on investment. He also earns income from employment at the 41% marginal rate of tax.
      • As it stands, he will have to pay SARS R70 000 during the next tax season.
      • If he contributes a lump sum R200 000 to a Retirement Annuity (RA) he will avoid paying SARS R70 000.
      • This is equivalent to SARS contributing R70 000 of the R200 000 investment.
      • He could increase his contributions to the company provident fund. But can only access his provident fund efficiently after the fund’s official retirement age of 65. His provident fund costs are too high and it is not performing well. We found him an RA that is performing much better and accessible at the age of 55!
  3. Freeze the value of your estate by transferring assets to a family trust
    • Make tax free donations of R100 000 per year to the trust (per spouse).
    • By reducing the value of your estate you reduce your tax liability at death. This is applicable to estates with net worth greater than R3.5million.
    • Need to form a trust? Click here to contact us today.
  4. Minimize taxation of trust income by distributing before year end
    • Make sure you avoid Section 7C of the Income Tax Act.
    • Too complex? Go back to step 1.
  5. Use a tax-free investment (TFI) account to benefit from long-term tax savings
    • You can invest R36 000 per year (up to a maximum of R500 000 over your lifetime) and benefit from growth free of dividends tax, income tax on interest and capital gains tax.
    • Combine a TFI with an endowment policy and see magic happen!
  6. Take advantage of the annual Capital Gains Tax (CGT) exemption
    • Individuals are entitled to an annual exclusion of R40 000 on any capital gains earned during the tax year.
    • By selling certain growth assets before tax year-end (eg. unit trusts) and repurchasing them shortly thereafter, you can make use of this annual exclusion and increase the base cost of his or her portfolio.
    • By increasing the base cost of the portfolio, the eventual CGT on disposal of the assets is reduced. (Transaction costs will have to be at a minimum).
  7. Own a business? Save tax by spending on research and development
    • Should your business incur expenditure on research and development of products, intellectual property or computer programs (other than those used in the business or certain prohibited industries), a generous tax allowance might be available in respect of expenditure incurred in the tax year ie before 28 February.
    • To be eligible for this tax allowance the taxpayer must register annually with the Department of Science and Technology.
  8. Donate to a good cause!
    • A Public Benefit Organisation (PBO) is non-profit organization, which has special approval by SARS to not pay any tax in South Africa on the donations it receives. The organisation is involved with charitable work e.g. healthcare, education, poverty alleviation, housing, conservation, environmental, cultural and religious services.
    • Your contributions to registered PBO’s are tax deductible up to a limit of 10% of your taxable income. Any donations exceeding this limit are carried forward and can be claimed as a deduction in the following tax year. To claim the tax deduction in your ITR12, you must ensure you obtain a s18A tax certificate from the PBO.
    • You can find a list of SARS approved PBOs on the SARS website here.
    • This is a great way to donate to a good cause, while also reducing your tax bill.
  9. Join a Medical Aid Scheme
    • There is some respite to expensive medical aid premiums that tax payers tend to overlook.
    • Husband, wife and three kids can reduce tax liability by R 15 396 per annum, calculated by using the current tax credits.
    • Factor this is in when you are shopping for medical aids.
    • Seeking a medical aid plan?
      • Chat with Vee, our WhatsApp ChatBot.
      • Vee is an example of how we are using technology (Python programming language) to help you.
      • Click here, and greet Vee with a friendly “Hi”.
  10. Keep a logbook if you receive a travel allowance or drive a company car.
  11. Claim commission related expense if you are a commission earner.
  12. Claim expenses if you are self-employed.
  13. Invest in a local start-up, indirectly.
    • If you want to back smaller, higher-risk trading companies, you can do so by investing in a venture capital company (VCC).
    • Individual investors are entitled to deduct the full amount of their investment from their taxable income in the tax year. The tax relief is 41% for individuals
  14. Claim back expenses related to working from home: A COVID-19 blessing!
    • Having a dedicated home office may allow you to claim a tax deduction from SARS if you are a full-time employee who spends more than half your working hours in your home office, a commission-earner whose employer does not provide you with an office, or a small business owner or freelancer who always works from home.
    • Click here to contact us for specifics, but generally, salaried employees are allowed to deduct from their income this percentage of the total cost of anything relating to the whole property, including rent or interest on a bond; any repairs to the premises; cleaning and maintenance costs; rates and taxes and wear and tear.
  15. Save Tax on School fees.
    • The norm is for employees to receive their income after PAYE, UIF and other deductions and to thereafter pay their children’s school fees from their net income.
    • However, in terms of Section 10(1)(q) of the Income Tax Act, employers are entitled to redirect a portion of their employees’ remuneration towards school fees in the form of a bona fide scholarship or bursary – thereby effectively reducing the tax liability of the employee.
    • Section 10(1)(q) applies under very specific conditions
    • In order to qualify, the gross remuneration threshold for an employee is set at R600 000 per year.

Good record keeping is essential. When you approach experts at Virtual Adviser for assistance, you will need to make these available to them. I hope that you enjoyed reading and learning from this article. Stay Safe.