Since recent budget adjustments, taxpayers have become accustomed to paying higher taxes in a number of areas. The VAT increase is in full swing, estate duty has increased, fuel levies are adding extra strain to a seemingly bullish petrol price and the usual tobacco and alcohol duties all add to the consumer’s already heavy tax burden. However, government has, over the years, come up with a few masterful tax incentives designed to promote employment, boost small-to-medium business entrepreneurs and promote scientific and technological innovation.
This article attempts to shed some light on these lesser-known tax incentives, allowing you to reduce your tax burden and plan your finances effectively.
Home office expenses
Following the global trend, many people prefer the freedom and autonomy of working from home, thereby saving themselves stress and the loss of productivity owing to a daily commute to the office. Self-employed individuals and employees who often work from home may be able to reduce their taxable income by claiming some home office expenses. However, Sars has set out specific conditions in order for individuals to qualify for home office deductions.
50% of your income
- If more than 50% of your income comes from a salary, you can qualify only if your employer allows or requires you to work from home and if you spend more than half your working hours in your home office.
- If you are a commission earner and your employer does not provide you with an office at company expense, you should be able to qualify.
- Lastly, you will definitely qualify for the home office deductions if you are a small business owner or a freelancer who always works from home.
The home office
A specific part of your home needs to be used exclusively as your office. Working off your dining-room table or holding meetings in your living area will not suffice for Sars purposes. A specific area of your home needs to be fully equipped for your office requirements. Taxpayers need to ensure that they have the necessary furniture, fittings, and computer equipment, and internet and telephone connections, among others.
It is important that taxpayers detail the square meterage of their home office on a floor plan as this will be used to determine what percentage of the office expenses will qualify as a deduction against taxable income.
Expenses that qualify
Rent or interest on a bond will likely be the biggest deduction in most cases. Repairs to the premises and cleaning and maintenance services also qualify. Rates and taxes and electricity are also deductible. Printing and stationery, telephone and internet and security also qualify.
An expense that many taxpayers overlook is the wear and tear on home office assets such as IT equipment and furniture and fittings. It is important that taxpayers can prove to Sars that the asset was specifically acquired for the home office and that it cannot be easily transferred to another part of the home. For example, a specialised desk would qualify as a wear and tear deduction; however, an ordinary table that could be used elsewhere in the home would not qualify.
Research and development
Sars is very much aware of the need for South Africa to become more actively engaged in scientific and technological innovation to save the country from having to pay exorbitant royalty fees to foreigners and to aid economic growth.
The fiscus has therefore provided a very generous tax deduction of 150% for all qualifying expenditure regarding scientific and technological research and development.
The details of this tax incentive can be found in Section 11D of the Income Tax Act. This incentive is a complex one and taxpayers who feel they might qualify should contact a tax practitioner to assist with meeting the requirements and setting up the deduction. Taxpayers are required to register their research and development projects with the Department of Science and Technology who will scrutinise the application and establish whether the project qualifies in accordance with Section 11D. The application to the Department of Science and Technology is a very complex one, as various aspects need to be considered. The taxpayer needs to prove to the Department that the project will contribute to the scientific and technological body of knowledge in South Africa, thereby aiding economic growth, among other things. Sars also stipulates that the project should benefit South Africa as whole and not only the taxpayer’s business.
The answer to the over-arching question as to what kind of research is worthy of fiscal incentive can be found in Section 11D. Basically, expenditure in any research and development for the purpose of discovering scientific or technological knowledge or for creating any invention that is patentable under the Patents Act No. 57 of 1978, any design that is registrable in terms of the Designs Act No.195 of 1993, any computer program as defined in the Copyright Act No. 98 of 1978, or any knowledge essential to such invention, design or computer program can potentially qualify for the 150% deduction.
Section 11D also provides for the deductibility of expenditure incurred, not merely in creating a new invention, but also in improving such invention, design or computer program if the expenditure relates to a new or improved function, improved performance, improved reliability or improvement of quality in that invention, design, computer program or knowledge.
In order to be deductible, the expenditure in question must be actually incurred by the taxpayer directly and solely in respect of research and development undertaken in the Republic. In addition to the aforementioned requirements, the expenditure must be incurred in the production of income and in the carrying on of any trade. Administrative salaries do not qualify for the 150% tax deduction; however, salaries of staff directly involved in the research and development project do qualify.
In addition to the 150% tax deduction on qualifying expenditure, Sars also provides for an accelerated depreciation allowance (50:30:20) on the plant and machinery used for research and development projects.
Taxpayers whose projects are approved are required to submit a progress report to the Department on an annual basis.
Tax savvy savings
Tax-savvy savings opportunities can be quite confusing to explore as there are many options and just as many opinions on the subject. It is useful for taxpayers to consult an independent financial planner for advice tailored to their specific financial requirements.
The two main savings vehicles that Sars incentivises are tax-free savings accounts and retirement annuities. Both of these seem to cause some confusion, but they are extremely efficient when it comes to saving for the future.
A tax-free savings account can be a money market or fixed-term bank account, a unit trust investment, a JSE-listed exchange traded fund and many more. There is absolutely no limit to how much your investment can grow. So if you choose an incredibly well-performing fund, you could double, triple or even quadruple your savings with no ramifications. Interest and dividends earned are tax-free for life.
Contributions in respect of tax-free investments are subject to an annual limit of R33 000 and a lifetime limit of R500 000. There are harsh punitive penalties for exceeding the prescribed contributions so adhering to the limits is crucial.
Retirement annuities are another investment tool that has tax-saving benefits. Individuals will receive a uniform deduction for contributions to retirement annuities, pension funds and provident funds. The annual tax-deductible contributions are limited to the lesser of R350 000 or 27.5% of the greater of ‘remuneration’ or ‘taxable income’. Contributions in excess of the limit can be rolled over and utilised in the future.
It is important to note that contributions to a retirement annuity are tax deductible while contributions to a tax-free investment are not tax deductible. However, annuity income is taxable while income from tax-free investments is not taxable. It is therefore important to determine what will be best suited to the individual’s circumstances.
Nicole Janse van Rensburg is a manager at Hobbs Sinclair Advisory.