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Even at the best of times, no one wants to pay more tax than is necessary, and people ponder: How much is actually necessary?
For some, it means their full legal obligation, reduced only to the extent allowed by the law (more on that later). For others, it extends to omitting any income that the South African Revenue Service (Sars) can’t easily detect.
How we deal with this temptation is the true measure of our tax morality, and it is fair to say practically everyone wrestles with this dilemma at some time. Yielding to it crosses the line between tax avoidance and tax evasion, between being financially savvy and being criminal.
Shortfalls at Sars in recent years are indicative of our slowing economy, but also suggest that more people are overstepping the line.
South Africa is low on the feel-good factor we had some years back. Many people are over their heads in debt, and fear for their financial future, or even just making ends meet. House prices, stock markets and real incomes have all stagnated over the last five years.
Such an environment does not foster tax morality. Nor do reports that Sars is understaffed and in disarray. Add the online chatter calling for a tax boycott and the temptation to cross the line is great.
There are precious few deductions available for salaried employees these days and most require some spending upfront, such as incurring legal or medical expenses.
One, rare, way to pay less tax without spending more money is to contribute to a retirement fund. The contribution might be seen as an expense because it reduces take-home pay but, in fact, it merely shifts money on an individual’s personal balance sheet, from “bank savings” into “retirement savings”.
We are not talking small money either. You can deduct total contributions to a pension, provident or retirement annuity fund up to 27.5% of your taxable income. The overall limit is R350,000 per annum. The amount saved depends on an individual’s marginal tax rate. For example, at 30%, the saving is R30,000 in tax for every R100,000 contributed.
This is beneficial to individuals, who shift money from the tax coffers to their own retirement savings pots, as well as to government, which wants people to save so that they don’t burden the state in old age.
The icing on this cake is that retirement fund portfolio returns have been better than most people think. Investing in the right retirement annuity, such as the 10X High Equity fund, which has delivered good long-term growth at very low cost, remains an excellent long-term investment. High Equity Portfolios are very well diversified, with at least half the portfolio exposed to international assets and rand hedges listed on the JSE, such as Naspers, Richemont and Anglo American.
The 10X High Equity Fund returned 11.2% in 2019 despite the weak economy and all the shenanigans with state-owned enterprises. This handsomely beat the 6.9% return on cash. Over 10 years, the 10X High Equity fund delivered 11.2% pa versus 6.2% for cash. R100 invested for 10 years earning 6.2% per year grows to R180; with an 11.2% per year return it grows to R290.
The compound impact of high returns over a 40-year working life is enormous. The same R100 investment would grow to R1,100 earning a 6.2% pa return over 40 years, but would grow to R7,000 earning an 11.2% pa return. This shows the importance of investing in growth assets, like a High Equity Portfolio, rather than investing in seemingly safe investments, like money market funds.
Also, investment returns in an RA are not taxed, whereas investments in cash funds or unit trusts are, so your after-tax return will be even better.
A similar dilemma to the tax dilemma above is: How much is it necessary to pay in fees for my investments. Like tax, fees are levied for a service. And, like tax, the fee you pay and the service you receive can vary dramatically.
Fees come off the total return of your investment and reduce your long-term wealth. The impact of this compounded over the lifetime of your investment can be ruinous.
Most South African investors pay total fees of around 3% pa; 10X charges less than 1% before Vat. An extra 2% may not sound like a big difference, but over a 40-year savings period, it can make a difference of 60% to your total investment value.
Find out what you’re currently paying in investment fees, shop around, and see where you can get a better deal. Moving to a less expensive fund or asset manager is a change you make once but benefit from forever.
To qualify for tax relief for the current tax year additional contributions must be made by 29 February.