SARS can pay for your next holiday....

I don’t understand, show me by way of an example.

Say for example, you earn R300,000 in a tax year (from 1 March to 28 February the next year), and say you didn’t make any contributions to a retirement product, then you will be taxed on the full R300,000 you have earned (approximately R46,600 in tax). But say that you have contributed R30,000 towards a RA during the same tax year, SARS will only tax you on R300,000 - R30,000 = R270,000 of income. The tax on this is around R38,800 and therefore you would have saved R7,800 in tax. So effectively, you got a R7,800 return in the first year of saving only R30,000. That is a return of 26% in one year! Another way of looking at it is that you actually only forked out R22,200 but have an immediate investment of R30,000 - SARS funds that extra R7,800 for you. Unbelievable but true!

But is this not tax evasion, is it even legal?

It is absolutely legal and written into the Income Tax Act. You will definitely not end up in jail on tax evasion charges.

Is there a catch?

Not in the way you think. The ‘catch’ is that there are limits. The maximum amount that can be deducted from your income that relates to these contributions, is 27.5% of your remuneration or taxable income (whichever is higher), and no more than R350,000 can be deducted in a tax year.

For the above example, if your remuneration/taxable income is R300,000, the maximum contributions in a tax year that you can make towards retirement products is 27.5% x R300,000 = R82,500. So in this example, if you max-ed out your RA contributions, you will only be taxed on R300,000 - R82,500 = R217,500 instead of on the full R300,000.This will translate into a huge tax saving.

It still sounds too good to be true. Why would they do this?

The answer is quite simple: Only 6% of people in South Africa will be able to retire comfortably and will not be dependent on the state for SASSA pensions. SARS (and therefore the Government) wants to reward and incentivise you for contributing to a retirement product now, so that your future self does not become dependent on the state or on society - even on your family. The government would rather have people who are self-sufficient in their old age than pay out more grants. The money can then be used to build infrastructure, create jobs, and so forth. .

Okay, it sounds better. But is the tax incentive the only reason why I should save money in a RA?

Ah, great question! And no, the other advantage of saving money in a RA, is that any growth and investment returns in an RA, i.e. things like interest received, dividends received or capital gains, are all tax free!

Surely, there must be another catch?

Well, SARS does not want to give you a tax refund only for you to immediately withdraw the money you put into an RA to pay your monthly bills. So in order to get the tax relief, SARS only incentivises committed investors to ensure that you leave the money alone and only use it for what it is intended for, i.e. for your retirement.

So how do they do that?

For any retirement product, you will only have access to that money once you reach a certain age. For RAs you only have access to that money from the age of 55 as the earliest age. For pension and provident funds, it can be anything from 60, 63 or 65 and is governed by the fund rules for each fund.

That’s okay, as it will give the investment time to really grow given the effect of compound interest. So I can then withdraw the money at age 55 and go on that around the world tour?

SARS is smarter than you think. Remember, the tax incentive is so that you have money for your retirement. Not for around the world tours. So, you will only be able to take 1/3rd of the money at age 55 for a RA, in cash (which SARS will tax if that amount is higher than R500,000) and with the rest you must buy a monthly annuity (pension) from an insurance company. This is to make sure that once people have access to their retirement money, they don’t waste it on new cars and holidays. Remember that this money must be enough to pay for your expenses for years and years and years as this will probably be your only income.

When and how will I get this tax back then?

When you file your tax return (starting usually around the 1st July of each year), you will get a certificate from the RA provider which will be populated in your tax return. SARS will then deduct this from your taxable income, and will calculate the tax refund owed to you. When there is a refund payable, they usually do so within days of submitting your tax return. So the sooner you file your return, the sooner you get the refund owed to you.