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Maximise Your Tax Advantages For 2015 By Contributing To Your RA From Today.

As a result of new legislation, the existing tax year finishing in February 2015 is the last year in which there is no rand restriction concerning tax deductible contributions towards RAs, provided it falls within the 15 % restriction as described beneath.

Currently, employees are allowed to contribute 15 % of their non-retirement financing income to a retirement annuity, and these contributions are tax deductible in the year the contribution is made. Of particular interest to high net worth taxpayers, is that tax deductible contributions will be limited to R350 000 per tax year as from 1 March 2015.

It is very important that taxpayers are advised of these modifications so they can optimize their tax advantages for the 2015 tax year. Below is a simple example to show how the adjustments will reduce the tax benefits of RA contributions:.

Suppose a taxpayer’s non pensionable income is R5 million. Presently, 15 % (R750 000) of this earnings can be contributed to an RA and is tax deductible. Tax will be calculated based upon a revenue of R4.25 million presuming there are no other deductions. This translates to a massive tax advantage due to the contribution.

As from 1 March 2015, the tax deductible amount will be determined at 27.5 % of the greater of compensation or pensionable income but the amount which is tax deductible in the same year as the contribution will be limited to R350 000. Under the identical scenario as above, the taxable income will be calculated on R4.65 million compared to R4.25 million presently, drastically reducing the tax advantages.

While excess contributions can be carried forward (and from 1 March 2014 even be used after retirement, which by itself is a significant benefit as it makes tax-free post-retirement income possible), it is likely that contribution amounts for these higher net worth taxpayers will certainly reduce after 1 March 2015. Therefore the tax year to finish February 2015, just before the contribution limit is implemented, should be viewed as an appropriate time to make additional contributions to an RA.

What can taxpayers do?

Think of this as the “RA Campaign” which starts now! Speak to one of the partners at VGA Chartered Accountants Inc. and subscribe to this blog for email pointers and one-pagers that will concentrate on various possibilities opening as legislation and regulations change.

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