There is no prohibition in South African tax law on minimizing your tax payable. The principle is actually well part of our common law. We have a section enacted in our Income Tax Act that deals with transactions that are solely entered into for the purposes of tax evasion. However, SARS has lost a couple of cases on when applying this section as tax saving plans often passes a business or substance test. In the 2005 Budget Speech it was announced that the anti-avoidance section may be re-drafted to give it more teeth.
Proper tax planning is not something that one can really do when you submit your tax return. People who really save a lot of tax are those that consider the tax consequences of every transaction or investment they make. It is a continuing process and the help of a knowledgeable tax advisor can really save you money.
Although it is impossible to provide examples of tax planning that applies to everyone, below are some basic ideas. Should you be serious about saving a bit of tax (40cents in every Rand earned is actually a lot!) we should best consider your personal circumstances.
Income splitting: The husband earns a large salary and the wife effectively nothing. All investment income that goes to the husband is taxed, after some exemptions, at 40%. There are legitimate means of letting the wife earn all income and therefore make her use her the tax exempt threshold completely and thereafter starting to pay tax, after using her own exemptions, tax at 18%.
Donations: Few people make use of the annual amount exempt from donations tax. Over years this reduced your estate significantly and also lessens your taxable income. The amount is currently R30,000 per taxpayer and where husband and wife uses this together to transfer wealth to children, we can start talking serious savings after a couple of years.
Retirement funding: Making investment decisions with after tax income when you can achieve the same investment decision with before tax income makes little sense. You should use your full retirement amount that is tax deductible every year. This really makes a lot of sense when you start seeing the effect over a couple of years.
Capital gains tax exclusion: The annual amount of capital gains that is exempt per person per year is R10,000. This is available to every taxpayer and people should use this even if it means buying and selling some shares to realize the gain. It starts costing one money when you sell all your shares after five years and make a R50,000 gain. After the R10,000 exclusion and with a 40% tax rate, you will end up paying R4,000 tax that is completely unnecessary.
Tax compliance: It pays to have your tax returns correctly and completely submitted every year. For some reason South Africans like telling about they get away with not paying tax. Many are caught as SARS has become a much more professional organization and they are becoming more efficient every year as their collection targets increase. We see many people get caught and there is nothing we can do to really help. For some reason South Africans do not like talking when they have these experiences.