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How to Reduce Your Taxable Income

Save more by understanding where – and how – you pay taxes.

Andrew Padoa

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Many South African despise paying the vast amount of tax that we do. There seems to be tax on everything – tax on our income, tax on things we buy, tax when we fill up with petrol, even tax when we pass away!

The individual’s marginal rates of tax in South Africa range between 0% and 40%. 40% may seem high, but we are far from having the highest marginal tax rate in the world. Aruba (a little island in the Caribbean) has a marginal tax rate of 59%, Sweden is at 56,6% and Denmark at 55,4% (just to name a few).

There are ways in South Africa to not pay tax. It can either be done using tax avoidance methods or tax evasion methods. Tax avoidance is the legal way a taxpayer can reduce the amount of tax that he/she owes. Tax evasion, however, is when a taxpayer illegally avoids paying tax and can get a taxpayer into serious trouble (ask Schabir Shaik or Nicholas Cage).

Some tax avoidance methods individuals can use to reduce their taxable income are highlighted below.

1) Retirement annuity contributions if you have non retirement funding income

Non retirement funding income can be defined as income that is not linked to a pension or provident fund. You are currently able to contribute a maximum of 15% of your non retirement funding income to a retirement annuity, all of which should be tax deductible.

So, for example, if you earn an income of R 800 000 per annum and do not have a pension or provident fund, you would be able to contribute R 10 000 per month into a retirement annuity-all of which should be tax deductible. As you are in the 40% tax bracket (with an income of R 800 000 per annum), you would be saving yourself approximately R 48 000 in tax per annum.

If you are on a company pension or provident fund, but have an alternative source of income (such as rental income from property), this rental income would be classified as non-retirement funding income and therefore a retirement annuity can be used to reduce your taxable income in this situation.

2) Income protection premiums

Capital disability pays you the benefit if you are totally and permanently disabled. For example, someone who is injured in a car accident and cannot work for a few months will not be able to claim capital disability as they will recover from their injuries.

However, income protection is designed to assist individuals to stay afloat should they become unable to work in their own or a similar occupation. It is a very important benefit that should be considered by individuals. The premiums for income protection are tax deductible.

3) Donating to Public Benefit Organisations

Tax payers are able to donate up to 10% of their taxable income to public benefit organisations and claim a tax deduction on this donation, as long as these public benefit organisations comply with section 18A of the Income Tax Act.

4) Medical aid contributions

Taxpayers under the age of 65 may deduct monthly contributions to medical schemes (a tax rebate to be known as a medical scheme fees tax credit) up to R 230 each for the taxpayer and the first dependant on the medical scheme and R 154 for each additional dependant.

Taxpayers can also claim a deduction for medical scheme contributions exceeding four times the amount of the medical scheme’s fees tax credits and any other medical expenses limited to the amount which exceeds 7.5% of taxable income. Don’t forget to keep receipts of all these transactions as you will need them when you submit your tax return!

Taxpayers who are 65 years and older, as well as any taxpayer where the taxpayer, the taxpayer’s spouse or child is a person with a disability, may claim all qualifying expenditure as a tax deduction.

As one can see from the above, careful planning can significantly reduce the amount of income tax you owe. Speak to a Certified Financial Planner ®, who should be able to assist you in reducing your taxable income in a legal and intelligent way.

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Want to become a self-made millionaire? Here are 5 things you need to know.

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Andrew Padoa works in the Private Client’s division at Consolidated Financial Planning. His area of expertise is investments, estate planning, retirement planning and portfolio benchmarking. He has had numerous articles published in the media on a number of topics related to personal financial management. Andrew is passionate about educating people and has given several financial literacy talks to both schools and corporates. His objective is to use his abilities and knowledge to help others achieve their financial goals. Visit www.consolidated.co.za for more information

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1 Comment

1 Comment

  1. Bus Hire Johannesburg

    Dec 20, 2012 at 09:33

    Small businesses are struggling to stay afloat as they have to “give” up to 40% on their profit margins by way of tax.

    In the Tourism Sector ( and other Segments ) most times a Tax Clearance Certificate is required to do business and to enter to contracts with larger corporations and Government Institutions.

    This means tax payments must be up to date, which also means cash flow is put under pressure to stay up to date with tax payments.

    Tax Avodiance Strategies is a must for SMME’s.

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Personal Finance

10 Tips To Become A Millionaire This Year

Becoming a millionaire requires changing your mindset and implementing some changes.

Murray Newlands

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Becoming a millionaire may seem out of your reach, but it’s possible with the right attitude and guidance. The fact of the matter is your income can only grow as quickly as you do, so you need to change your mindset to achieve your goal of becoming a millionaire.

Once you have a millionaire mind, you can’t lose it, no matter what financial or business mistakes you make along the way. To get yourself there, you’re going to need some structure. To help you, I’ve outlined the top ten tips you should follow to become a millionaire this year.

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Personal Finance

If You Think These 5 Things, You’ll Never Get Rich By The Time You’re 30

Five common mistakes entrepreneurs make when starting a business and how to correct them.

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Last week, I had lunch with a millennial who wanted some advice about a business he’s starting. After the usual small talk, we got down to discussing his business plan. Within a short time, it was clear that his business idea was great, his plan for executing was fairly solid and he had gathered together a strong team to help him make it happen.

So far, so good. But, to be frank, this guy has no chance of being successful with his current mentality. What it takes to be rich (or successful in any measure) has a lot more to do with your mindset than your ideas and plans.

From the time we started in business at the ripe ages of six and seven, our Grandpa Joe taught my brother Matthew and me many lessons about the details of running a profitable business. Over the years, we learned about how to create a business plan; how to market our products and services; and how to take care of customers, vendors and employees. All this knowledge has been invaluable to us in creating and running successful businesses. But, what our grandfather taught us about attitude and mindset trumps all other lessons.

Without calling out the specific individual I spoke with recently, below are five “hypothetical” attitudes that will get you nowhere in your journey to success – and the attitudes that should replace them.

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Personal Finance

5 Habits That Lead To Millionaire Business Success

You need the right habits if you’re going to succeed.

Timothy Sykes

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What do all millionaire businesspeople have in common? Well, a lot of things.

I found from a recent study that 80 percent of all millionaires still go to work every single day. They’re working people just like me. But, they have to keep themselves in work or it all grinds to a halt. So what are the habits you need to make your business a success?

1. Patience

Nothing is ever going to come easy. You can look at the likes of Steve Jobs and Bill Gates, as well as the other usual suspects, to realize that success didn’t come with their first venture. Many of them failed time and time again. It took patience for them to become successful.

I read an article recently about 36-year-old teacher Andrew Hallam who became a self-made millionaire on a teaching salary. But, in his spare time he invested smart and lived frugally.

It proves you don’t have to inherit lots of money or become an instant success to make a millionaire business.

Related: 4 Ways To Become A Millionaire Even When You Start With Little

2. Dedication

You have to be dedicated to your craft if you’re going to become successful. Going back to Bill Gates again, he started his business in the back of his garage. Now that’s dedication.

It’s what I tell all my students. If they’re not dedicated to this, then they should leave. You need to be able to push through the barren periods if you’re going to reach the oasis of success.

3. Ambition and big dreams

Have you ever heard the quote, “Shoot for the moon. Even if you miss you’ll land among the stars”?

I take that to heart because even if you aim to become a billionaire and miss you still might be a millionaire many times over. Take the Wright Brothers as an example. Not content with creating a successful glider in 1902 they went on to create the world’s first airplane in 1903, making four brief flights in Kitty Hawk. It demonstrates the importance of dreaming big because you never know what you might achieve.

Related: 12 Millionaire Habits To Start Making Serious Money Soon And Build Wealth In A Hurry

4. Learn from mistakes

Every good businessperson will mess something up. It’s inevitable. What’s important is how you learn from your mistakes over time. Do you adapt after making your mistakes?

Millionaire businesspeople always set some time aside to reflect. Then they create a plan of action for ensuring that it doesn’t happen again. Most failed businesspeople put it down to “bad luck.”

5. Focus on niches

This important! Try to take over a whole industry at once and you’ll inevitably get swallowed up by the competition. Start small and control your own niche before moving into another niche. When you master your small area, you can push on and expand.

Related: 21 Choices Millionaires Make That You Aren’t Making But Should Be

You’ll be amazed at how much easier it is to expand after you master your own niche/audience first.

Do you have what it takes? That’s the question I always ask novice businesspeople. You need a plan and you need the right habits if you’re going to succeed.

This article was originally posted here on Entrepreneur.com.

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