28 February is the end of the tax year for all individuals, trusts and many companies and close corporations. As we approach the year end and have a good idea of our overall income and tax position for the year, now is the time to take some critical decisions.
The following matters are all crucial to optimising our tax positions: Individual tax savings by topping up retirement annuities
As up to 27.5% of taxable income, capped at R350,000 per year, may be deducted from your income in respect of retirement annuity contributions made before 28 February, now is the time to be reviewing your retirement provision. If this could affect you, now is the time to speak to your financial planner. Reducing your estate by donating to the family trust
Each individual taxpayer may make donations up to R100,000 per annum free of donations tax. Such donations must be made in cash or kind. If one is using a trust for estate planning (or any other) purposes, such donations might be made to the trust. This has the effect of lowering the personal estate and increasing the assets of the trust.
Both the taxpayer and spouse may make tax-free donations as described provided this is done before 28 February. Minimising taxation of trust income by distributing before year end
The income received by or accrued to a trust will be taxed in the trust (at high rates) unless:
- The income is attributable to the founder and taxed in his hands; or
- The income is distributed to a beneficiary within the same tax year. The beneficiary/ies would then be taxed on such income unless one of the attribution rules apply.
As the tax rate of beneficiaries will often be lower than that of the trust, it makes sense, from a tax point of view, to distribute some or all of the taxable income. Of course there might well be other factors in deciding what portion, if any, of a trust’s income should be distributed. The needs, estates and tax position of each beneficiary should be considered before a decision is reached by the trustees. Of critical importance is that such distributions are only made to beneficiaries recorded in the trust deed. It is worth remembering too that distributions to beneficiaries do not require to be made in cash, and the terms of eventual payment by the trust should be carefully considered by trustees, having regard to the current liquidity and future cash requirements of the trust to fulfil its responsibilities to all beneficiaries.
In making this decision, we advise that the new Section 7C amendment needs to be taken into consideration with regards to any interest-free or low-interest loans made to trusts. As from 1 March 2017 loans made to trusts at below the SARS prescribed interest rate will be deemed to be donations, attracting donations tax at the rate of 20%. The donation is calculated on the difference between interest charged and interest at the SARS prescribed rate.We suggest that you contact us to discuss the possible clearing out of any loans that you might have made to any trust before 28 February 2017.
As the income for the year ending 28 February will only be known after that date, it will be necessary to make an accurate estimate before a distribution. The trustees might instead be advised to resolve before year end to distribute for example “all net interest to beneficiary A and B in equal shares” or “the whole of the capital gain to beneficiary C”. What is crucial however, is that the distribution must be made before 28 February and that the decision to distribute must be made and ratified prior to that date. This decision should be evidenced by a signed resolution dated accordingly. Use a tax-free investment account to benefit from long-term tax savings
In March 2015 the government introduced a tax-free investment product to encourage us to save our after-tax money. You can invest R30,000 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. Eliminating debit loan accounts in companies by distributing dividends now
Should a company make a loan to its shareholder or another entity controlled by its shareholder, such loan could have deemed dividend consequences, unless interest is charged at a rate at least equal to the SARS official rate.The amount of the deemed dividend is calculated by determining the difference between actual interest charged on the loan and interest charged at the SARS prescribed rate. To avoid the deemed dividend, this loan account needs to be repaid in full by the end of February (or interest needs to be charged at the SARS prescribed rate).
However, in certain circumstances it could be beneficial to not repay the loan account and accept that a deemed dividend is payable. This is because an interest-free loan from your company is probably the cheapest form of finance you will be able to find, assuming that the company is able to facilitate the loan. Please contact us in order that we may carry out a cost vs benefit analysis of your debit loan position. Taking advantage of the annual Capital Gains Tax (CGT) exemption
All 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 year-end (e.g. unit trusts) and re-purchasing them shortly thereafter, the tax-payer 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. Of course transaction costs will have to be considered in making this decision. Saving tax by spending on research and development
Should your company 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, i.e. before 28 February. To be eligible for this tax allowance the taxpayer must register annually with the Department of Science and Technology. If your budget has not yet been consumed, this can provide a useful tax-planning opportunity. Urgent reminders about provisional tax
Taxpayers, including companies, with a taxable income over R1 million have been burdened with the responsibility of estimating their total taxable income including capital gains, with greater accuracy. For these taxpayers, should their estimates of total tax payable for purposes of their second (payable 28 February) provisional tax return be less than 80% of the tax eventually assessed, a penalty of 20% of the incremental tax will be payable. Any taxpayer therefore, whose total taxable income including the taxable portion of capital gains might reach or exceed R1m, should take particular care in calculating their second provisional tax return.
For taxpayers with income under R1m there is also a potential trap if their estimate is based on amounts lower than the last year assessed. In this case, penalties are payable if their estimate is less than 90% of the eventual assessed taxable income. It is often safer to use the last year assessed, and not to reduce the estimate. Meredith Harington is here to assist our clients in legally optimising their tax positions. Please contact us if we can be of assistance in preserving your hard-earned wealth.