CAPE TOWN – In this column, Shelly Moreno from Harvard House answers a reader’s question about income tax in retirement.
Question: I retired shortly after my 70th birthday. Fortunately I had planned well, and my monthly pension receipt is over R25 000. My biggest problem now is Sars. They receive a PAYE remittance from source each month, but insist that my receipts place me in the 40% tax category and want more.
I have this year arranged for an additional R3 000 per month voluntary payment to Sars from source to try to stem the series of demands I am getting. I have been audited at least twice since retiring.
My medical monthly payments are nearly R10 000 per month, which did reduce my taxable income for the tax year just past, but with the new tax adjustment scheme for medical costs, taxpayers are moved up the scale for taxation with a pittance being refunded according to a fairly complicated framework of calculation. I feel like this is predation on older folk who have placed themselves beyond taking a government grant. Please can someone elucidate on this issue and explain how I can reduce my tax burden?
Unfortunately Sars appears to be correct. The reason PAYE is not covering the tax amount is that the pension income is taxed by the pension fund as if it were your only income. On assessment by Sars, however, your pension income will be taxed along with all your other income. After allowable deductions, you will then be taxed according to the tax bracket applicable to your level of taxable income.
That said, the 40% bracket only starts at R673 101 taxable income. Based on the R25 000 pension you receive per month (or R300 000 a year), if you receive no other income then your taxable income should only be taxed at the marginal rate of 30%. Therefore, Sars is saying that you have another R373 100 taxable income over and above your pension.
You refer to being audited at least twice since your retirement. We sympathise with you – the inconvenience and loss of productive time incurred during a Sars audit can be highly frustrating. As you know, Sars is always looking for more money and one of those ways is through auditing taxpayers.
With the introduction of eFiling, Sars employees have more capacity to audit tax payers. Individuals, estates, trusts, companies and close corporations can be selected at any time for audit. There are no exceptions. Sars’ intention is for every taxpayer to be audited at least once in their lifetime whether it is for Income Tax, VAT, PAYE or a Diesel Rebate audit. There is no rand limit guiding whether or not you will be selected. Even where there is no tax to pay, Sars can still select the taxpayer for audit.
With regards to medical expenses, you are correct in that there has been a change in the calculation. In 2011, the system of deductions for medical scheme contributions was converted to credits in an attempt to improve the equity of the tax system. This conversion was based on the idea that medical tax credits provide a more equitable form of relief than medical deductions because the relative value of the relief does not increase with higher income levels.
For individuals, medical expenses fall into two categories. Firstly, contributions to medical aid schemes, and secondly out of pocket medical expenses (expenses paid which are not refundable by your medical aid). In the 2012 tax year, medical expenses were deducted from taxable income. In the 2013 and 2014 tax years, there was a phase in of the medical tax credit system.
Taxpayers over 65 years of age were not affected by these changes in previous tax years, but are affected for the 2015 tax year onwards. From the 2015 tax year, all taxpayers will no longer get a deduction for medical aid from taxable income. All taxpayers will instead be on the medical tax credit system which has the same effect as a rebate, which decreases your final tax payable.
Taxpayers over 65 get a basic tax credit of R3 084 for the main member of the medical aid. You then also get a further tax credit equal to 33.3% of your qualifying medical expenses. In other words, you are getting a tax deduction at 33.3% whereas your income may be being taxed at 40%.
Without knowing what other income you earn, it is difficult to advise how you could reduce your tax burden. A person earning a monthly pension and having medical deductions is very limited in terms of reducing their tax liability. However, a potential way to reduce tax would be to provide the pension fund manager with a copy of your medical aid membership certificate and write a letter asking for him/her to recognise the medical tax credit when calculating the PAYE on your pension. Our understanding is that the fund manager may take this into account, but is not obliged to as the tax laws for medical expenses have changed from a deduction system to a credit system.
In addition, we would suggest that you meet with a registered tax practitioner or a financial planning consultant who may be better able to restructure your finances according to your personal circumstances. This will better equip you to meet your financial needs and at the same time minimise your tax liability.
Shelly Moreno is the Head of Tax at Harvard House.
If you have any questions you would like answered by financial planning experts, please send them to firstname.lastname@example.org.