VOLUME 11
I
JANUARY 2015
Retirement Savings Have you made the most of your tax deductions?
GRAYSWAN
Wealth
Are you a smart investor and actively making the most of SARS’s
income tax concessions to enhance your long-term savings?
The 2014/2015 tax year end is around the corner and you only
have until the end of February to make a new or an additional
contribution to a Retirement Annuity (“RA”) in order to take full
advantage of the current tax deduction regime. Two important
factors to consider are:
•
The contribution must reflect in the administrator’s bank
account by Friday, 27 February 2015 to receive a RA
contribution tax certificate that will be effective for the
2014/5 tax year.
•
We are not encouraging investors to top up old
fashioned contractual RAs, but rather to use noncontractual RAs on a LISP (Linked Investment Service
Provider)/platform. Why? Any additions are likely to
be exposed to penalties should you wish to stop or
decrease your contributions in future or transfer the RA
to another administrator.
What is a RA?
A RA is a retirement product designed for individuals to provide
them with a tax efficient investment vehicle to save for retirement.
You may invest in a RA regardless of whether you are already a
member of an employer pension or provident fund or not. You may
only retire from a RA at the age of 55 but there is no maximum
retirement age. At retirement you may take one third in cash but
have to purchase a compulsory annuity with the remaining two
thirds or you have the option to withdraw the entire amount in
cash if the value of the RA is less than R75,000.
What are the tax benefits of a RA?
The main tax benefits, according to current legislation, are:
1.
Contributions to a RA are tax deductible
In respect of current contributions, a taxpayer is allowed to
deduct the greater of:
•
•
•
15% of non-retirement funding income per annum;
R3,500 less allowable pension fund contributions; or
R1,750.
Non-retirement funding income refers to other income that
is not taken into account by your employer to calculate
contributions to a pension or provident fund. Examples of
other income includes rental income from a property after
the expenses have been taken into account or interest
income after the exemption of R23,800 has been taken
into account or bonuses (if excluded as retirement funding
income by your employer). Non retirement funding income
excludes retirement fund lump sum benefits, assessed
losses, capital gains and local dividends.
Contributions to RAs may be used by retirees to obtain a
deduction against the annuity income they may be receiving
(unless it originates from a provident fund). As noted before,
there is no maximum retirement age for members of RAs.
Unused deductions can be carried forward to future years
or used to increase the tax-free amount at retirement.
GraySwan Wealth is a division of Gray Swan Financial Services (Pty) Ltd (Reg. No. 2010/009813/07) which is an authorized Financial Services Provider (FSP No. 42290)
2.
How do contributions to a RA work?
Investment returns are tax free
There is no income tax or dividend tax or capital gains tax
payable on the investment returns of a RA. In other words,
the investment growth of a RA is tax free.
3.
No estate duty
Estate duty (currently 20% of net asset value) taxes is
not applicable to a RA. This presents a good opportunity
to build up savings in a RA should the value of an estate
exceed the current R3.5 million abatement.
There are three ways to invest in a RA:
1.
2.
3.
Lump sum investment; or
Monthly contribution; or
A combination of the above.
The minimum investment amount for a lump sum and/or monthly
contributions depend on the rules of the administrator of the RA.
Let us look at a basic (example 1) and a more complex example
(example 2) to illustrate the tax implications of making a
contribution to a RA.
Example 1
Investor Y is not a member of a company pension fund and currently invests R1,000 p.m. in a RA. Investor Y receives the following
forms of income per annum:
Salary= R240,000
Other taxable income
= R 60,000
Total non-retirement funding income = R300,000
The allowable RA contribution is the greater of:
•
•
•
R45,000 (R300,000 x 15%); or
R3,500 - allowable pension fund contribution (not applicable in this scenario) = R3,500; or
R1,750
The greater of the three options is R45,000.
Because Investor Y has already made total contributions of R12,000 (R1,000 monthly debit order x 12), he can make an additional
lump sum contribution of up to R33,000 (R45,000 – R12,000) to a RA to receive the maximum tax benefit.
How does this affect Investor Y’s income tax liability?
The tables below compare the income tax payable prior and post the lump sum contribution.
Income tax payable pre lump sum RA contribution:
Income tax payable post lump sum RA contribution:
Gross Income R 300 000 Taxable income R
Less: DeductionsLess: Deductions
RA fund contributions
R (12 000)
RA fund contributions
R
Taxable Income R 288 000 Taxable Income R
Tax per scale
R 60 547 Tax per scale
R
Less: Primary Rebate
R (12 726)
Less: Primary Rebate
R
Tax Payable
R 47 821 Tax Payable
R
300 000
(45 000)
255 000
51 532
(12 726)
38 806
By contributing an additional R33,000, Investor Y has saved income tax of R 9 016.
GraySwan Wealth is a division of Gray Swan Financial Services (Pty) Ltd (Reg. No. 2010/009813/07) which is an authorized Financial Services Provider (FSP No. 42290)
Giving meaning to numbers
Example 2
Investor X receives the following forms of income:
Fees from a private practice Salary from employment (member of pension fund)
Interest
Annuity income
= R600,000
= R360,000
= R 26,800
= R 40,000
He has the following expenses:
Expenses for running the practice (all tax deductible) = R70,000
Pension fund contributions
= R15,000
He has not made any contributions to a RA during the year.
The allowable pension fund contribution is the greater of:
•
•
R1,750; or
R27,0000 (7.5% x R360,000 retirement funding income)
Thus the full R15,000 is allowed as a deduction as he is allowed to deduct a maximum of R27,000.
The allowable RA contribution is the greater of:
•
•
•
R85,950 (15% x R573,000* non-retirement funding income); or
R3,500 – R15,000 (allowable pension fund contribution) = R0; or
R1,750
The greater of the three options is R85,950.
Thus investor X can contribute a lump sum of up to R85,950 to a RA to receive the maximum tax benefit.
*Non-retirement funding income is calculated as:
Fees R 600,000
Less expenses of practice
R (70,000)
Interest
R 26,800
Less interest exemption
R (23,800)
Annuity incomeR 40,000
Non-retirement funding income
R 573,000
GraySwan Wealth is a division of Gray Swan Financial Services (Pty) Ltd (Reg. No. 2010/009813/07) which is an authorized Financial Services Provider (FSP No. 42290)
How does this affect Investor X’s income tax liability?
The tables below compare the income tax payable prior and post the lump sum contribution.
Income tax payable pre lump sum RA contribution:
Income tax payable post lump sum RA contribution:
Taxable income
R1 026 800 Taxable income
R1 026 800
Fees from private practice R 600 000 Fees from private practice R 600 000
Salary from employment R 360 000 Salary from employment R 360 000
Interest R 26 800 Interest R 26 800
Annuity Income R 40 000 Annuity Income R 40 000
Less: Exemptions R (23 800)
Less: Exemptions R (23 800)
Basic interest
R (23 800)
Basic interest
R (23 800)
Less: Deductions R (85 000)
Less: Deductions R(170 950)
Expenses of running practice
R (70 000)
Expenses of running practice
R (70 000)
Pension fund contributions R (15 000)
Pension fund contributions R (15 000)
RA fund contributions
R
- RA fund contributions
R (85 950)
Taxable Income R 918 000 Taxable Income R 832 050
Tax per scale
R 293 172 Tax per scale
R 258 792
Less: Primary Rebate
R (12 726)
Less: Primary Rebate
R (12 726)
Tax Payable
R 280 446 Tax Payable
R 246 066
By contributing an additional R85,950 Investor X has saved income tax of R 34 380.
If you would like to make use of this opportunity to
boost your retirement savings while increasing your tax
deduction, kindly contact one of our Wealth Investment
Consultants. Our consultants will not only provide you with
advice regarding your tax savings but will also empower
you to invest the monies in regulated, low cost and well
diversified investment products which are managed by the
top investment teams in the country.
WE’D LIKE TO HEAR FROM YOU
Tania Theron
Head of Wealth
021 852 9092
071 605 1863
tania@grayswan.co.za
Mart-Marié de Jongh
Investment Consultant (CFP® Professional)
021 852 9092
072 380 9139
martmarie@grayswan.co.za
A2, The Beachhead, 10 Niblick
Road, Somerset West, 7130
www.grayswan.co.za
GraySwan Wealth is a division of Gray Swan Financial Services (Pty) Ltd (Reg. No. 2010/009813/07) which is an authorized Financial Services Provider (FSP No. 42290)