The question you might be asking is, why should you even care?
To be honest, for most of you reading this, it doesn’t make a difference at all. But hey, that doesn’t mean it won’t make a difference in future, so keep reading.
Your pay slip – Is it taxable income or gross income?
Chances are if you work for a boss, you receive a salary slip every month. On one side of your payslip is money coming in and on the other side is money going out. At the bottom it says what’s left, and let’s be honest it’s never enough is it?
You can be forgiven for thinking that since you’re being taxed on your monthly salary, that this is your taxable income. It isn’t & SARS refers to this as your gross income.
The Income Tax Act defines gross income as the total amount, in cash or otherwise, received by or accrued to you, excluding receipts and accruals of a capital nature.
Without getting too technical, you can see that your monthly salary is an amount of cash received by you. This means it’s gross income.
Does that mean that any other type of cash I receive must form part of this gross income?
Not at all. Let’s say, for argument’s sake, a friend of yours repays the money you lent them. That wouldn’t be gross income but things like these are:
- Turnover from any business you own as a sole proprietor or partner
- Travel allowances
- Commission you might earn
- A monthly pension paid to you (Known as an annuity)
- Maintenance paid to you by an ex-spouse
- Fringe benefits including the use of a company car
- The interest you earn from any investment you’ve made
- Dividends paid to you by any South African company
This means that the rental income received from your garden cottage should also be declared.
The receiver of revenue will, of course, wish to tax you on all the above. If the only tax you’ve been paying so far is the tax on your monthly salary, it could mean you owe even more in taxes.
But here’s some good news…
You might even qualify for an exemption from tax
For instance, a certain amount of the interest you earn from a cash investment is exempt from tax. This amount can change from year to year and depends on your age. In 2018 the tax-exempt amount of interest allowed is:
- R23,800 per annum for those younger than 65, and
- R34,500 per annum for those 65 and older
Let’s take Mike as an example.
- Mike has an investment at one of the banks and earns 5% nominal interest per annum.
- Mike is younger than 65 and qualifies for R23,800 as his interest exemption
- R23,800 divided by 5% means he can invest R476,000 into a Money market account (or fixed deposit) and not pay a cent in tax.
- As soon as he steps over the R476,000 mark – or if he starts earning a higher interest rate – he starts having to pay tax
Another example is dividends.
Dividends paid by South African companies to you as a shareholder of the company are tax exempt. This is because dividends are taxed in the hands of the company before being paid out to you.
However, any other type of dividend paid to you, let’s say for instance, your employer pays you a dividend for services rendered, is not exempt from tax.
Another one which is exempt from tax is maintenance payments (Do we hear a collective sigh of relief?).
There are a few other exemptions, but since this isn’t the point of this article, we’re going to move on.
After all these exemptions are deducted from gross income, we’re left with what the receiver of revenue calls income. It doesn’t take a rocket scientist to fathom that if the only income you receive is from a salary, then your gross income is your income.
Did you notice that none of the exemptions help in reducing the tax you must pay on your salary?
Why do they call it income and not taxable income?
That’s because the receiver of revenue wants to give you one last chance at lowering your taxes. The truth is, the receiver wants to incentivise you to take care of some of your own problems. They don’t want you to become their problem one day when you’re old and possibly sickly, so what better way to incentivise you than with a tax break?
It’s at this point where you’re allowed to claim certain deductions. Once these deductions have been made, the receiver calls “time-out”, and that’s when your Income becomes Taxable Income.
What kind of deductions are we talking about?
This depends on whether you’re self-employed. If that describes you, then you’re allowed the general deduction whereby you can claim any expenses related to the carrying on of your business.
Basically, these expenses must be incurred in the production of income.
We’re assuming you’re not self-employed and so we’re heading to the specific deductions.
Now there are a whole bunch of weird deductions allowed which won’t apply to the average taxpayer. Examples of this are:
- Legal expenses relating to your trade
- Restraint of trade payments, and
- Employer contributions to approved retirement funds
The one you and I are most interested in is the contributions made by a taxpayer to retirement funds one.
With this one, you can deduct your contributions, as well as the contributions made by your employer – to any of the following:
- Pension funds
- Provident funds, and
- Retirement annuities
You may deduct from your taxable income the lesser of:
- R350,000, or
- 27,5% of the higher of your remuneration or your taxable income
Remuneration is what you earn from your place of work, while taxable income would include any passive income you might earn over and above remuneration.
Getting back to why you should care….
By now you should have noticed that to qualify for a deduction, there needs to be an expense.
In this example, you need to contribute to an approved retirement fund. What’s unique is that even your employer’s contribution to your retirement fund is allowed as a deduction in your hands. In the past, it wasn’t so.
However, basing your contribution to retirement funds solely on what your employer pays you could be a mistake. You need to take into consideration all forms of income earned by yourself. This is known as gross income.
But hang on, you can’t calculate your retirement deduction just yet. What if you qualify for any exemptions from tax?
After deducting all your exemptions, you finally get to income and now you’re ready to calculate your contribution to retirement funds.
If your sole source of income is your monthly salary, then you’re good to go with calculating your retirement fund deduction.
If you qualify for the general deduction, or any of the specific deductions which come prior to the retirement funds deduction, then those first need to be deducted before doing this calculation.
You know what’s easiest? Get yourself an accountant to do all of this for you. That’s what we do!
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The InsuranceFundi team
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