Implement your own tax-saving strategies

Few people see taxes as anything other than a grudge expense. However, by implementing the correct tax strategies, you may find ways to save.

In this article, we consider what a tax strategy is, and we look at some examples to illustrate this. We then consider its role in investments, and we highlight some factors you should consider.

Tip: Our income tax calculator is the perfect tool for your tax needs.

What is a tax strategy?

Ernest Zamisa, financial adviser at Momentum, says that tax participation is often viewed with disdain, particularly by employees entering new positions.

This is because business owners don’t always explain payroll requirements, and when an employee’s taxes are deducted, they are caught by surprise. 

“If you intend to participate in the economy, then paying taxes is as certain as death. In order to get the most out of this, you should develop a tax strategy, which is a guided and informed plan for your taxes,” says Zamisa.

Wilri Engelbrecht, financial planner at Fiscal, says that a tax strategy uses data and facts to set out tax decisions in support of the taxpayer’s goals, whether a business or individual. 

“A tax strategy should be well documented, as the benefits and costs of each element of the strategy need to be considered prior to implementation,” says Engelbrecht.

He adds that many individuals and small businesses are unaware of the tax risks to which they are exposed. By identifying the activities that drive tax outcomes, you will be able to create a basis for your tax strategy.

Examples of effective tax strategies

Engelbrecht says that you can have more than one tax strategy in place. He sets out examples for a small business and an individual.

1. VAT-based strategy for a small business

“A small business can register for VAT only when sales are likely to exceed R1 million for the tax year in the near future – usually two to three months ahead of time,” says Engelbrecht.

He explains that the time required to ensure that all supporting documents are aligned with the requirements of the Value-Added Tax Act, the cost associated with maintaining a more sophisticated accounting system, and the necessary knowledge to ensure compliance with the act, are all factors to consider.

Engelbrecht says that a business with a turnover of more than R1 million should be able to afford the services of a knowledgeable bookkeeper or an external professional accountant.

“This will ensure that they submit the correct documentation to SARS, and the hired professional will also be able to perform VAT reconciliations where necessary,” says Engelbrecht.

2. Annuity-based strategy for an individual

“If retirement savings are an important goal, then there are various investment vehicles to achieve this. However, not all investment vehicles have a tax benefit,” says Engelbrecht.

Where a benefit does apply, a tax deduction of up to R350,000 per year can be achieved.

“The funds within the retirement annuity will be accessible from the age of 55 and limited to one-third of the funds. Therefore, if access to the full fund is required at retirement, another investment vehicle, such as a tax-free savings account, could be considered,” says Engelbrecht.

He adds that the growth within this account will not attract any tax consequences, and you can withdraw the full amount tax-free.

Using investments as part of your tax strategy

Chris Potgieter, managing director of Old Mutual Wealth Private Client Securities, says that investment performance goes hand in hand with effective tax structuring.

“No amount of investment outperformance or cost-saving can ever compensate for poor planning and structuring,” says Potgieter.

Therefore, he says that it’s crucial to consider how an investment portfolio is structured from an estate-planning perspective. He believes that wealth can only be protected and enhanced when investment structuring and management are coherent.  

“A portfolio manager will work closely with clients to assist them in developing a strategy to meet their investment objectives. They will identify the best structures to preserve and grow their wealth, and then regularly monitor the potential tax implications on their investment portfolios,” says Potgieter.

Some regulated examples include tax free savings accounts, retirement annuities and preservation funds, life endowments, offshore life endowments, and local or offshore investment trusts.

Factors to consider for your tax strategy

Ken Brown, who’s the founder at SME.Tax, says that all businesses should have a strategy to mitigate their tax liabilities.

“A tax strategy may include PAYE incentives, Accelerated Depreciation Incentives, and a Small Business Corporation Incentive,” says Brown.

Danielle Luwes, tax manager at Hobbs Sinclair, points out the following factors you should consider when planning your tax strategy.

• The structure of your company. The tax requirements and considerations for businesses are dependent on the type of business entity, whether a sole proprietorship, partnership, or private company – each with its own pros and cons in terms of set-up and tax benefits.
• Tax registration. The South African government levies a series of direct taxes and indirect taxes on citizens and companies operating in South Africa. Direct taxes include tax varieties, such as income tax, corporate tax, wealth tax, gift tax, and expenditure tax. Depending on factors such as turnover, payroll amounts, and whether you are involved in imports and exports, you could also be liable to register for other indirect taxes, duties, levies, and contributions, such as VAT, fuel duty, entertainment tax, PAYE, customs, and excise.
• The taxes you will need to pay and the amount. A company is required to pay income tax at a rate of 28% on its taxable income for the tax year, and dividends withholding tax at a rate of 15%. A sole proprietor is subject to income tax on their taxable income at rates ranging from 18% and 45%.
• Whether you qualify for tax relief. There are various allowances, exemptions, and special deductions stipulated in the Income Tax Act which you can take into consideration when putting together a tax strategy.
• Record-keeping. To prepare accurate tax returns, it’s vital to keep records of all company activities. Along with your income and expenditure, you must hold on to any information that may be required to support entries on your tax returns.

Should your small business implement a tax strategy?

Engelbrecht says that when you consider tax strategies, it’s important to consider the resource constraints and cost involved in implementing these effectively.

“Imagine that a small business wants to develop a complex tax strategy, which requires tax specialists to assist in its development, but the business doesn’t have a skilled accountant who can implement the strategy,” says Engelbrecht.

He explains that the cost involved in doing this may outweigh the tax benefit, which means that it will not be in the best interest of the small business.

“Small businesses and individuals are advised, from a cost and administrative point of view, to keep their strategies uncomplicated in order for the business to remain sustainable,” says Engelbrecht.

Find out more about tax-free investments, and whether they are the right investment for you.