Limit your tax liability, even when you are no longer working

Since one’s retirement years are often periods of financial pressure – having to make do on an income that’s lower than during one’s working life – ideas about how to save money are always welcome. One focus area is a person’s tax affairs, and we asked Stephan Hartzenberg, a Product Architect at 10X Investments, for some guidance for retired people on how to work with the South African Revenue Service (Sars) to minimize their tax burden and maybe even get some money back.

Here are some thoughts from Hartzenberg:

Be confident about how the tax system works – at any age

Many people feel they are out of their depth when it comes to tax matters and are intimidated by having to submit documents to Sars. In fact, Sars has gone out of its way to assist taxpayers to make the process of submitting tax returns easier than it ever used to be, and they have consultants available to assist people.

While not everyone is obliged to submit a tax return, in many cases you are doing yourself a disservice by choosing not to. There are ways of getting tax money back, if you are eligible for a refund, but Sars can only refund money if you let them know the details of your tax situation.

This applies to people at many stages of life. The sooner one embraces the opportunity to understand the tax processes and to engage with Sars, the easier it will become in the future.

Pensioners should submit an annual tax return

If you’re a pensioner who receives income from a pension fund and/or an investment firm, any PAYE (pay-as you-earn tax) that is due will be deducted by the fund or the firm before they pay you your income. This means that you automatically pay income tax to the revenue authorities. At this stage the only factor taken into account to calculate how much PAYE is due (in addition to your earnings) is your age (people over 65 and 75 pay slightly less income tax than younger people), but there may be other allowances available to you.

This is the reason you should submit a tax return: all the other deductions or rebates you are entitled to can only be claimed when you submit a tax return. The institution that pays you the income and submits the PAYE is responsible only for providing information about your income. You will need to submit the information about expenses or allowances.

Many pensioners receive income from sources where PAYE is not automatically applied, such as rental income or perhaps they have a small business. In this case they may not be paying enough tax, which means they are breaking the law and are in for a nasty surprise at some point in the future.

The most significant expense that a pensioner can claim against a tax liability is the medical aid credit. If you are a member of a medical aid, you receive a monthly credit of R310 (because you are taking the burden of healthcare off the State’s shoulders by providing for it yourself). This credit applies to a spouse, too, so a couple can effectively claim R7440 per year from Sars, which would be offset against the PAYE already paid.

Plan for the tax costs (and other expenses) that could arise on death

When a person passes away, their estate will incur a number of expenses that relate specifically to the event of death. Among them are tax liabilities such as Estate Duty and Capital Gains Tax. Estate Duty will kick in if the estate is worth more than R3,5 million - and it can amount to a sizeable sum.

Capital Gains Tax is applicable when the owner of an asset passes away – it arises from an increase in the value of the asset over time, with the date of death being the date when the asset’s value is assessed.

While one cannot calculate upfront exactly what these liabilities could amount to – since they are dependent on a value that will be determined on an unknown date in the future – one can make some provision for the possibility that these taxes will be levied. The most significant issue is that the estate will need cash to be able to settle the tax liability. Should there be insufficient cash available, an asset may have to be sold. This is not always a good solution, since it may involve a sale at a time that is not ideal, or it may be an asset that the beneficiaries would rather retain.

Options include setting aside cash regularly in a separate bank account for the payment of estate costs, or taking out a life insurance policy specifically for this purpose.

Hang on to your documents

Keep all your documents in a safe place. Sars may audit your tax return, in which case you will have to submit all the documents you added into calculations.

The bottom line is that even once you are retired you are still a taxpayer and, as such, you can still benefit from tax allowances. To educate yourself, start with the Sars website, where you will find a lot of information including info about free tax education workshops, which are presented at most Sars branches.

There are also a number of excellent websites, such as Tax Tim, that give information and guidance about what you can and cannot claim and how to go about it. 

If your tax situation is complicated, perhaps you receive income from various sources and run a home office, you could seek guidance from a tax expert. Often the fee they charge will be covered by the refund you get. Peace of mind is worth a lot too!

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