Calculating tax relief

Many ordinary salary-earning taxpayers are aware that there are certain expenses on which one can claim tax relief, but often they have difficulty in working out what portion they can claim tax relief thereon.

16 January 2011 | Steven Jones

Many ordinary salary-earning taxpayers are aware that there are certain expenses on which one can claim tax relief, but often they have difficulty in working out what portion they can claim tax relief thereon.

But help is at hand, as we discuss some of the more common deductions one can claim.

Pension fund contributions, Next to capital gains tax, one of the most confusing tax concepts for most people is that of “retirement-funding employment” (RFE) income. This is the measure used to calculate the deduction allowed for pension fund contributions.

But in actual fact, it is quite simple. Go to your HR department and ask them what portion of your income is taken into account when determining your contributions to the pension fund. This will be determined by the rules of the fund, and varies – for some it may be a percentage of total package, while for others it may be based on basic salary only (ie, excluding allowances). Overtime payments are normally excluded.

Once you have this figure, multiply it by 7,5%. The result is the amount that SARS will allow as a deduction. Obviously, if your actual contribution is less than this amount, SARS will only allow the amount actually contributed. However, if your contribution is more than the 7,5%, the portion disallowed will eventually form part of the tax-free portion of your pension fund when you retire.

Provident fund contributions Unlike pension funds, employee contributions to a provident fund are not tax-deductible. However, the portion of your income that is taken into account for calculating the contributions is still regarded as RFE income, which has an impact when calculating the allowable amount deductible for retirement annuity fund contributions.

Since employer contributions are tax-deductible in the hands of the employer, and do not constitute a fringe benefit in the hands of the employer, most provident funds tend to be structured as “non-contributory” funds (ie, funds where the employee does not make any direct contributions thereto).

Retirement annuity (RA) fund contributions
The reason why the distinction between RFE income and non-RFE income is so important is because the amount allowable as a tax deduction in respect of RA fund contributions is 15% of non-RFE.

In other words, you can contribute to an RA fund up to 15% of any income that is not taken into account when determining contributions to a pension or provident fund. The deduction also applies to any taxable income not derived from employment, such as annuity payments or rental income. This also means if you are not a member of any such fund, you can contribute up to 15% of your total income (from whatever source) to an RA fund and claim tax relief thereon.

However, if 15% of your income from non-RFE employment is less than R1 500 per annum (or R3 500 less pension contributions), you can claim whichever is the greater amount. Once again, any RA fund contribution for which tax relief is not granted is carried over to future years, and if there is any remaining portion thereof by the time you retire, such portion forms part of the tax-free portion of your eventual payout.

Medical fund contributions
SARS allows a fixed monthly amount upon which tax relief will be granted (known as the “cap”). The amounts are R670 per month each for the primary member and first additional beneficiary, and R410 per month for each beneficiary thereafter. For a married member with a spouse and two children, this makes the monthly deductible amount R2 160.

The cap applies whether the contributions are made by the employer or the employee. If the employer contribution exceeds the monthly cap, any excess will be taxed as a fringe benefit, whereas if the employer contribution does not exceed the cap, relief up to the amount of the unused portion will be granted on employee contributions.

However, if you are over the age of 65 years the cap does not apply. This means that there is no fringe benefit on any employer contribution to a medical scheme, irrespective of the amount, while employee contributions are fully tax-deductible.

Entertainment allowances
These were scrapped some years ago, so the amount deductible by ordinary salary-earners in respect of entertainment expenses is a nice round number – zero!

Other expenses
If an employee is required to incur expenses for business purposes as part of their job requirements, such as subsistence, travel, maintenance of a home office, and the like, there must be (a) specific stipulations in the employment contract that this is required, and (b) a specific allowance provided for this purpose.

Different rules apply to each allowance, including the portion of the allowance that is taxed upfront – 80% of travel allowances are taxed upfront; some (such as for uniforms) are not taxed at all; while most other allowances are fully-taxed upfront. Likewise, there are specific ways in which claims against such allowances are made.

– steven@moneywebtax.co.za