Your most important asset

Consider this picture: A 43-year-old man – in seemingly perfect health – sits on a couch in his living room with his wife and daughter. “Gary can get R2 million in life cover and R1 million in disability cover for just R700 a month,” the advertisement reads.

Or this one: A provident fund member, highly upset about a government plan to enforce the compulsory annuitisation of two-thirds of his fund benefit at retirement instead of allowing him to take all the funds in cash at retirement.

There is something about a large sum of money that gets people much more excited than the idea of a steady monthly income.

So entrenched is this concept, that it is frequently cited in songs, game shows or literature. The “pot of gold at the end of the rainbow” and “Who wants to be a millionaire?” come to mind.

Why do investors favour a lump sum?

It may be because “wealth” is generally associated with a lot of assets or a large pool of money.

Unfortunately, most people struggle to manage a significant pot of money – particularly if they need to live off it for a long time.

As the former chief executive of a large asset manager succinctly puts it: “Most mere mortals are used to a monthly income. Large capital amounts get us all confused.”

Human beings overestimate the value of a lump sum, adds Brad Toerien, CEO of FMI.

Research it recently conducted suggests that if offered a choice of R1 million or a guaranteed income of R10 000 a month for the rest of their lives, most people will prefer R1 million, even though the second option is worth significantly more.

The preference for a lump sum may also be because financial planning has historically been done this way and that people prefer to have access to a large pot of money.

“But in reality, what we work for is a lifestyle and to protect that you need a regular stream of income,” he says.

The preference for lump sum benefits – in retirement and with regard to injury, illness or death – may also be related to a distrust of institutions.

People may argue that if the money is in their bank account, it is theirs to use as they see fit, but if a financial institution or government has to provide them with an income, their fortunes are in a third party’s hands.

Apart from the behavioural issues related to a lump sum and people’s tendency to spend a large part of their pot quite quickly, it can also be difficult to determine how much money someone would need to provide a continuous future income. Assuming Gary from the ad died soon, would R2 million be enough to settle his debts and still provide enough of an income to cover his family’s monthly living expenses?

And then there is also the inflationary impact to keep in mind…

Lump sum vs regular income

From a financial planning perspective, there has been a growing realisation that people’s greatest asset is their ability to earn an income throughout their lifetime.

While most defined contribution funds lack a clear income-goal focus for individual members, commentators are increasingly highlighting the need to focus on income instead of a pot of money during planning.

In a recent Moneyweb article, US Nobel Prize winner and retirement specialist Professor Robert Merton, argued that retirement funds should use an income measure to tell members how they were doing on their way to retirement, instead of just reporting what the current fund value (lump sum) is.

Merton said it was much easier for people to relate to an indication that if they currently earned R10 000 a month and continued saving for retirement the way they do, they would only get an estimated income of R2 000 a month in retirement after inflation was taken into account.

While there is value in receiving a lump sum – which could be used to settle debts or to pay for a wheelchair or home improvements or a funeral depending on the circumstances – it is of much less value if it will largely be depleted to pay for these expenses and there is no on-going future income stream.

It is perhaps time to question whether it is appropriate to place so much emphasis on saving towards a large pot of money at retirement or the importance of taking up a large lump sum death, critical illness or disability benefit.

While there is undoubtedly value in all of these lump sum benefits (people will surely be better off having a lump sum retirement or risk benefit than not having it), the value of a lump sum is significantly impeded if investors don’t also have the ability to earn a monthly income in line with their living standards. First, solve for income…

Which bodes the question: Should the focus not be shifting towards financial planning that ensures investors can replace their monthly income from today until the day they die (and thereafter if they have dependents) and that it can be adjusted in line with inflation instead of just targeting a seemingly large pot of money at some point in future?

Investors may just get to the end of the rainbow, only to realise the pot of gold will not be covering their expenses for long.

Source: Money Web

How much you need to save each month for a R100,000 home loan deposit

According to recent data from FNB, the average age of a South African home buyer has increased from 38 to 44 this year.

In an attempt to help first-time buyers enter the market sooner, Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, has broken down some of the steps you can take when saving for your first home.

“If you take a realistic look at the property market, you will discover that you will need a minimum of R100,000 to use as a deposit and to cover the transfer costs and various other expenses on an entry-level property,” he said.

While it is possible to take out a 100% access bond, he said is still advisable to have as close to this amount as possible saved to cover various ad-hoc expenses that come with purchasing property.

Having the money readily available will also increase your bargaining power when it comes to negotiating interest rates on your home loan, Goslett said.

“Realistically, first time buyers can expect to save for a period of around five years before they reach their R100,000 target. Any shorter than this, and the buyer will have to be putting away a huge chunk of their earnings each month.

“As it stands, to reach the targeted amount in five years, a buyer will need to save as much as R1,700 per month. In four years, this amount increases to R2,100; for three years, it climbs to R2,800; two years will see them putting R4,200 away monthly; and one year will force them to put aside a whopping R8,300 per month.”

“Depending on where you are in life, perhaps you foresee a time in the near future where your expenses lessen drastically, and you are able to save aggressively for a short period of time.

“For recent graduates who have just entered the job market, for example, it is entirely possible –not easy, but possible – to put R4,200 aside for two years while living at home and saving on the expense of renting elsewhere. However, for the most of us, even finding just R1,700 per month will take some doing,” he said.

He added that the first step is to find a financial institution that can help you reach your savings goals.

“It is better to put your monthly contribution into a tax free short-term investment that yields higher returns than a normal savings account at your bank.

“Chat to your financial advisor to find out what the best options are. In all likelihood, they will be able to find an investment for you that will allow you to put away less than R1,700 a month but still reach R100,000 by the end of five years.”

“The next step is to cut back on unnecessary expenses. Pay off your clothing and other store accounts and close them as soon as possible. According to the 2014-15 World Bank Report, credit facilities such as credit cards, overdrafts and store cards make up 65% of credit usage in South Africa.

“If you can cut back on this unnecessary spending, you could be putting that monthly repayment straight into savings,” Goslett said.

As a final piece of advice, Goslett suggests taking up a part-time job to earn extra cash to put into savings.

“Sometimes, it is simply not possible to scrape that R1,700 out of your existing salary. There are various part-time jobs a person can do to earn a little extra cash that won’t take up too much spare time,” he said.

“Tutoring pays roughly R200 for just two hours a week; freelance writing at the industry standard R2 per word pays R1,000 for one 500 word article; babysitting and weekend promotional work usually pays around R150 per hour – and these are just a few of the options that are readily available to anyone who has the necessary skills and time.”

“By the end of the five year saving period, you will be able to afford a lifelong asset that will offer financial security well into your retirement. At that point, those five years of discipline and sacrifice will look like time well-spent when you consider the overall picture of your life,” Goslett said.

Source: Business Tech

5 common debt traps and how to avoid them

South African consumer debt has reached more than R1.71 trillion, according to the Reserve Bank. In addition, a report by the World Bank has revealed that 25 million South African adults, out of 37 million, owe money to financial institutions or other corporate lenders such as shops that allow them to buy now and pay later. The combination of the recent Vat increase, the largest petrol price hike ever in South Africa and the escalation in luxury goods excise duty will make repaying debts all the more difficult.

Here are top tips on how to avoid falling into the five most common debt traps, along with ways for navigating back to safety if you are already ensnared.

Credit card debt

Easy bait for the financially uneducated consumer, banks often offer rewards such as holidays, cash back and vouchers to entice clients into the credit world. However, the National Credit Regulator claims that 58% of South African consumers are struggling to pay off their credit cards. Most credit card users start off with the very best intentions and try to repay their debt, but many end up paying a significant amount of interest simply to keep their heads above water. 

Before you sign up for a credit card, look at what you can afford and limit your monthly spending to less than that amount. Pay back your debt in full each and every month and your credit card will become a useful financial tool for building a positive credit rating. If you have already fallen into this credit hole, lock up your credit card somewhere safe and pay off as much as you can afford until the debt is wiped out. 

Store accounts

Stores offer massive discounts, special offers and vouchers to get people to sign up for and keep using their accounts. With back-to-school, Easter, seasonal changes, school dances and Christmas, pressure is constantly on consumers to shop more and just put it on account. With this in mind it’s easy to see why 76% of South Africans are in debt due to store cards, according to data from a local debt management firm.

Ask yourself whether the store card is necessary and, if it is, use it wisely and buy only essentials with it. Otherwise, cut it up and use cash or other instruments to stay within your budget and avoid the trap.

Payday loans

Cash-strapped South Africans are increasingly turning to payday loans as a quick solution for making ends meet if they run out of money before the end of the month, but unfortunately this noose starts tightening rapidly once the first deadline is missed. Interest mounts up and many consumers are forced to borrow to repay the interest, leaving the original debt unpaid and attracting even more interest. 

This avenue should be carefully explored before applying. If you have already gone down this road, pay the debt back as quickly as possible. 

New car loans

The shiny chrome and new leather smell of a new car appeals to many motorists to the extent that they forget about their budgets and commit themselves to rampant debt. Loan periods were extended recently so that consumers could repay a new car loan in up to 72 months. To ease the monthly burden on motorists even further, balloon payments were introduced. This allows for lower monthly payments, but the final monthly payment could be as much as a third of the total loan. This puts ownership out of reach for most people. 

Let your brain trump your heart in this decision, which has long-term and extensive financial implications on take-home pay. Analyse your needs and meet them. Second-hand vehicles offer good value for money with good warranties. With reasonable kilometres on the clock and good record keeping, a five- to seven-year old vehicle will provide great durability.

Hire Purchase

Previously prevalent in the furniture and appliance industry, Hire Purchase (HP) is now a popular means for financing car purchases. The downside is that the interest rates on these contracts tend to be higher than the prime overdraft rate of interest. What’s more, as you are hiring the item until you have paid the full amount, failing to pay could result not only in the item being repossessed, but you losing all the money you have paid so far.

Try deferring your purchase until you have saved the money to pay in full for the item. If that isn’t possible, get a professional to review the draft HP agreement before you sign. You must also make sure that you can afford the repayments.

Before making potentially debt-inducing decisions, consumers should take some time to consider the long-term consequences. In addition, they should speak to a financial advisor who can help them make sound choices that will pay off in the long run. 

By Peter Tshiguvho

Peter Tshiguvho is the CEO of Metropolitan Retail. 

Source: Money Web

How to save while paying off debt

Saving is important. It can help us to become financially secure and provide a safety net in case of emergencies or unforeseen circumstances. With the rising cost of living and a high unemployment rate, it can seem easier to borrow than save.

“All of us need a savings account for access to contingency funds for unforeseen dilemmas,” says independent debt counsellor Renée Marais.

 “These contingency funds are an additional savings account that you have control over.”

Tips for beginners

Some examples of savings accounts that credit providers offer include:  

  • a dedicated savings account;
  • a 30-day savings account;
  • a 60-day savings account or
  • savings for education.

These savings accounts can be used to cover added costs that are outside of your monthly budget, such as payments to cover your medical aid shortfall, your yearly vehicle registration, maintenance on your vehicle or to save for a holiday.  

Marais advises that these savings should be made with discipline every month and should be at least 10% of your gross salary/ income per month. 

Savings vs. debt

Whereas saving is a choice, debt repayment is a contractual obligation between you and your credit providers.

“If you enter into a contract with any credit provider, they are acting in good faith in advancing you money, and you have an obligation to repay it,” says Marais. 

The National Credit Act, established in 2007, also advocates that you need to pay your living expenses, and that what is left over should be utilised for debt repayment. 

So, how much debt is too much? While there is no definite measure, there are ways to determine if you’ve taken on more than you can handle.

Fin24 previously reported that the most important way to determine whether you have too much debt is by calculating your debt-to-income ratio.

But how does one balance saving while paying off debt?

Marais offers some tips to help take control of your finances:

  • Have a budget and stick to it;
  • Have a savings plan for short term needs;
  • Have long term savings – insurance, assurance, policies, annuities, pension plan etc. to be facilitated with a registered Financial Services Agent;
  • Do not skip debt payments, as the penalty for that is additional interest and possible legal action;
  • Seek help before you are in default.

When to seek help:

  • If you are borrowing money from friends to make ends meet;
  • If you buy food, transport or housing on credit;
  • If you start skipping payments to some of your credit providers in order to pay others; typically, not paying your personal loan to pay your credit card, in order to utilise that for buying food.
  • Renee Marais NCRDC1780 is an Independent Debt Counsellor.

Source: Fin 24

5 Great Home Business Ideas for Retirees

While many people look forward to the lazy days of retirement, many retirees aren’t ready to stop working or they have financial issues that require them to continue to work. Getting another job is an option, but starting a home business allows for greater flexibility and freedom that retirees have earned after a long career.

Here are five home business ideas that allow retirees to capitalize on what they know or love to do to make a part-time or even full-time living from home or where ever they happen to be.

1. Coaching/Consulting

Just because you’re retired, doesn’t mean your knowledge and skills are gone too. Starting a home based coaching or consulting business allows you to profit from your work knowledge and experience. Coaching and consulting can be done completely from home using tools such as online conferencing and Skype. Or you can manage the business side from home and visit your coaching/consulting clients at their location or a local java joint.

Coaching can be done with private individuals, such as life coaching, or professionals, such as developing success strategies or interview skills. Consulting is usually done for businesses, such as improving sales or productivity of a team.

Getting started can be as easy as contacting a former employer and offering to help. You can also use your network to find referrals.

2. Writing/Blogging

People go online for information and entertainment. If you can provide what they’re looking for through a blog, you can make money through a variety of monetization options, such as affiliate marketing. If you have great information or entertaining stories, people will read what you post. Did you retire, sell your home, and buy a boat to follow the sun? People would enjoy reading about your exploits. Are you a retired accountant? People would be interested in hearing your tips on managing money and dealing with taxes.

Are you foodie? You can share your enjoyment and knowledge through food blog. The number of possible blog topics is endless.

Maybe you enjoy writing, but don’t want the hassle of starting and marketing a blog. Many bloggers and online media sources pay for articles. You start a freelance writing business or finding writing markets and jobs in a variety of places including freelance job sites, writing resources, and social media.

Many people enter retirement ready to write the great American novel, or share their life story through a memoir. While the traditional publishing route continues to be a challenge to break into, self-publishing is fast and affordable, and can be a profitable way to get your book to the masses.

3. Service Based Business

Nearly any skill you have can be turned into a home business. Selling those skills through a service-based home business is one of the fastest and least expensive ways to start making money at home. Any tasks that other individuals or businesses will pay to have done can be turned into a business including virtual support, bookkeeping, writing, landscaping, handyman, pet care and more.

Similar to coaching or consulting, you can contact your former employer to offer your services. Or you access your network to find potential clients.

4. Turn a Hobby into a business

Maybe you’re tired of the tasks you did at your job and don’t want to turn it into a business. Luckily, home businesses can be developed from hobbies, as well. Do you enjoy gardening? Start a gardening business or create how-to garden information products (i.e. ebooks, video tutorials) and sell them. Do you enjoy baking? Start a home based cookie business. Do you like to take photographs? Start a home based photography business or sell your pictures online.

Nearly any hobby can be turned into a potential business. Does your hobby create a product or service you can sell, or maybe you can teach others how to do the hobby either through live courses (online or off) or through an information product, such as a book or email course.

5. Ebay/Amazon/Etsy

After years of working and raising a family, you probably have a lot of stuff around the house. You can profit from your used and unwanted items by selling them on eBay or Craigslist. If you find items that sell well, you can find sources of them at flea markets, garage sales, and thrift shops to start your own eBay store.

Or, Amazon also offers the ability to sell used items. It even offers a service, Fulfillment by Amazon, whereby you can ship all your listed items to Amazon, and it will take care of shipping them to your customers.

If you enjoy making home made goods and crafts, you can sell your items on Etsy as well as at local flea or farmers markets, trade shows and bazaars. You can also sell vintage items over twenty years old on Etsy.

Ebay, Amazon and Etsy aren’t your only resources for selling items online. There are many places you can sell your electronics, clothing, art work, books, jewelry and more online.

You don’t need to be idle during retirement. You can take your life and job experiences and turn them into a source of income. And because you’re the boss, you can set the price and the rules.

Source: The Balance Small Business

10 questions to ask your tax practitioner

Many people are baffled by tax and often terrified by any mention of Sars and tax returns.

It is worthwhile engaging a tax practitioner who will not only ensure all your tax obligations are met timeously and efficiently but will also be able to provide you with a clear understanding of how the tax system works for your own peace of mind.

List of 10 recommended questions to ask your tax practitioner:

1.Are you a registered tax practitioner?

Firstly, and most importantly, you will need to ensure that you are dealing with someone with the requisite qualifications to assist you. In terms of the Tax Administration Act it is a criminal offence for a person to provide tax advice or complete returns on behalf of a 3rd party for fees if they are not registered as a tax practitioner with Sars and a Recognised Controlling Body.

2.How are your fees calculated?

Fees charged by a tax practitioner should be commensurate with the skill level of the practitioner given the nature and complexity of the work involved. Most practitioners will charge fees based on their time spent. The more complex the return, the greater the time and level of expertise involved resulting in a higher fee.

3.What tax returns will I be required to submit on an annual basis and when?

If you are a non-provisional taxpayer i.e. you are an employee who earns mainly salary income on which PAYE is withheld and have limited investment income, you will be required to submit only an annual income tax return. Returns for the year ended 28 February of each tax year will be available on Sars e-filing 4 months after the tax year end i.e. on 1 July. The deadline for submission of these returns is generally the end of November of that year.

If you are a provisional taxpayer i.e. an independent contractor, sole proprietor or individual who has significant investment/rental or other income, along with your annual income tax return you will also be required to submit provisional tax returns for the preceding 6 months by 31 August and 28/29 February of each tax year. Sars allows a later deadline of 31 January of the following year for the submission of annual income tax returns by provisional taxpayers.

4.What documentation must I provide for my annual income tax returns?

All tax certificates received by you for the relevant tax year should be provided. Examples of these include:

  • IRP5 Certificates – For salary/commission/contracting income received
  • IT3(a) certificates – For investment income received e.g. dividends, interest etc.
  • IT3(b) certificates – For capital gains on investments
  • IT3(s) certificates – For tax-free investments
  • Retirement Annuity contribution certificates
  • S18A donations certificates
  • Medical aid contribution certificates

Additional documentation that may be required includes:

  • Details of income and expenses incurred for the tax year where the taxpayer is a sole proprietor, independent contractor or earns rental income
  • A logbook recording business and private travel if a motor vehicle allowance is received by the taxpayer or he has use of a company vehicle
  • A schedule of medical expenses incurred as well as copies of all medical invoices and proof of payment of these expenses where a taxpayer qualifies for a medical expense tax credit.

5.What format should my documentation be in?

Although most practitioners will accept hard copy certificates, the preference would generally be for electronic documents since where requested by Sars, supporting documentation should be submitted in an electronic format via e-filing.

6.When can I expect to pay tax or receive my refund?

For individual taxpayers, final tax if any due, is payable 7 months after the end of the tax year i.e. by 30th September. In addition provisional taxpayers will be required to pay tax by 31 August and 28 February of each tax year. Provisional tax payments work as a prepayment of final income tax thereby reducing the final tax payable by 30th September.

Where Sars has issued a final assessment on an annual tax return with a tax refund due to the taxpayer this refund should be received by the taxpayer within a few business days unless the return was selected by Sars for review or audit. In the case of a review or audit the refund will only be paid out once the process has been completed by Sars. This can take anything from 30 to 90 days.

7.How do I make tax payments and can I check that these have been received by Sars?

Where a provisional or final income tax payment is due, your practitioner can either set this up on e-filing or provide you with the relevant payment details so that you can pay the tax directly to the relevant Sars bank account via EFT. Where the payment is set up on e-filing, you will still need to log on to your on-line banking profile and authorise this payment before it will come off your bank account. Note, all payment should go directly to an approved Sars account and one should be wary of any practitioner who requests payment to an account other than Sars.

To check that the payment has been received by Sars, your practitioner can request a statement of account on e-filing – this will reflect all outstanding amounts as well as payments received to date by Sars. Payments will normally take one business day to reflect on the Sars system.

8. When can I throw out the supporting certificates and documentation for my tax return?

Generally documents should be kept for a period of 5 years before being destroyed. E-filing will keep a history of all returns submitted and assessments received on this platform so it is not necessary to keep hard copies of this documentation.

9. Is there anything I can do to be more tax efficient?

A key duty of your practitioner is to ensure that you are tax efficient at all times. This may involve providing advice on the best vehicle through which you should run your business, the structuring of your salary as well as ensuring that you are taking advantage of all allowances and deductions provided in terms of the Act.

10.How will a change in my circumstances affect my tax situation?

Any change in your financial circumstance from the sale of your house to the purchase of a second property or from resigning your job to starting a business on your own could potentially have tax implications. To ensure that you are adequately prepared for these it is worthwhile discussing any upcoming changes with your practitioner to establish the effect that this will have on your taxpaying position. Your practitioner can then ensure that all resulting tax payment or filing obligations are met and help you avoid any potential penalties that may arise from non-compliance.

Clear communication between yourself and your tax practitioner will assist not only in ensuring that you stay on the right side of Sars but that you do so in the most tax efficient and cost-effective manner possible.

Jeremy Burman is a director of Private Client Financial, which is the specialist tax and financial services division of Private Client Holdings. 

Source: Money Web

Overtaxed on retrenchment: get your overpaid taxes back

Recently retrenched? You might have been overtaxed. Retrenchments over the past 12 to 18 months are specifically at risk of having been incorrectly treated for tax purposes, particularly so-called “voluntary retrenchments”.  Given the financial hardship and vulnerability of retrenched employees and their dependants, getting any overpaid taxes refunded is of great importance.

Favourable tax treatment for ‘severance benefits’

Payments that are “severance benefits” for tax purposes should qualify for favourable tax treatment. Broadly speaking, there is a once-off tax exemption for R500 000 of these benefits, and lower tax rates for the balance. An amount may be a severance benefit that qualifies for this favourable tax treatment if the employee is retrenched due to the operational requirements of the employer, employment is terminated because of sickness, accident, injury or incapacity, or where the employee is 55 years or older. In the case of retrenchment, this must be as a result of the employer ceasing to carry on an area of trade, or a general reduction of personnel or reduction of a certain class of personnel.

Potential problem for employees

The problem for an employee is that the employer is responsible for classifying the payments made, both in the application to Sars for a tax directive and in the “source code” that is put on the employee’s tax certificate (IRP5). As an individual, when you submit your tax return, your IRP5 is usually pre-populated on the tax return, and the source code applied by your employer tells Sars how you must be taxed. If, then, your employer put the wrong code on your IRP5, you may end up being incorrectly taxed.

Specific reason why the wrong tax treatment may have been applied

Sars issued a Completion Guide for IRP3(a) and IRP3(s) Forms, on or around July 2017, in terms of which there is an implicit legal interpretation that “voluntary retrenchment” does not qualify for the normal tax treatment of severance benefits. This implicit interpretation created a material negative impact on taxpayers as a whole and various tax practitioners believed that it was incorrect. Sait made submissions to Sars, with employment law input from Bowmans. Sars accepted these submissions, and indicated that “voluntary retrenchments” (as these would be considered in labour law) should be classified as “involuntary” in the application for a tax directive, and that a new guide would be issued as soon as practically possible.

This aspect may, still, be a problem in relation to the past. Either as a result of the guide, or from discussions with Sars on how to apply for directives (for the period before the guide was issued), various employers may either have been explicitly instructed, or implicitly told (as a result of the guide) to apply the less favourable tax treatment to retrenchment payments to employees.

This means that, if you were retrenched within the past year to 18 months, there is a real possibility that the tax deducted at the time, and the tax codes that tell Sars how to tax you when you file your tax return, might be incorrect, resulting in significant overtaxation.

How to tell from your IRP5 if you may have been overtaxed

If you were retrenched (not as one person with a “mutual separation” agreement but as part of the overall retrenchment of a group of people), you should check your IRP5 certificate to see if you were perhaps overtaxed. The payout you received should be reflected with source code 3901, and the employees’ tax (PAYE) deducted should be reflected with source code 4115. If these are the codes on your IRP5, you were probably correctly taxed.

If, in contrast, the payout you received was reflected with source code 3907, and the employees’ tax was reflected with source code 4102, then you were probably overtaxed.

What to do if you have not submitted your tax return yet

If you have not submitted your income tax return yet, covering the period when you received your severance benefit, then the problem can be fixed during the tax return submission process, either when submitting your return or objecting against the assessment as soon as the return has been submitted (ideally incorporating a formal request for a reduced assessment). This issue should be discussed in some detail with the registered tax practitioner who helps you with your tax returns. If you do not have a registered tax practitioner helping you, it would be a good idea to get help for this specific tax return filing.

What to do if you have already submitted your tax return

If you have already submitted your tax return, you would normally already have been assessed. You would need to object against the assessment, preferably including a formal request for a reduced assessment. Sars has guides explaining how to object against an assessment. It would be a good idea to get help from a registered tax practitioner for this specific objection.

Grounds for objection

The grounds for your objection would be that the relevant amount is a “severance benefit”, source code 3901, and not an “other lump sum” (source code 3907); and that the employees’ tax paid should be reflected with source code 4115, being tax on a severance benefit lump sum, and not “normal” employees’ tax (source code 4102). The supporting letter to your objection should explain that the amount you received is a severance benefit for tax purposes, give the reason (for example that your employer engaged in a general reduction of personnel), and explain that you are accordingly entitled to the tax exemption and special tax tables applicable to severance benefits.

Late objection

One is normally only allowed to object within 30 business days of the tax assessment. In all likelihood, your objection would be late, by a long enough period that you have to explain to Sars what the “exceptional circumstances” are, for your late objection. If you do not explain this, Sars may well declare your objection invalid, because it is late. You should explain the situation, and how it came to be that you only realised the mistake in your tax assessment now. Then, some of the key exceptional circumstances that you can refer to, include:

*The original reason for the mistake was the incorrect classification by your employer of the severance benefit amount. This is a circumstance outside your control. A capturing error or provision of incorrect information in a tax directive application and IRP5 certificate issued by your employer, is of analogous seriousness to a capturing error or provision of incorrect information by Sars, and so this is an exceptional circumstance in terms of section 218(2)(e) read with (g) of the Tax Administration Act;

*To the best of your knowledge and belief, the incorrect classification by your employer arose as a result of an erroneous implicit interpretation adopted by Sars, as also set out in the first publication of the “Completion Guide for IRP3(a) and IRP3(s) Forms”. This comprised the provision of incorrect information in an official publication by Sars, as envisaged in section 218(2)(e) of the Tax Administration Act, which is an exceptional circumstance;

*The e-filing system is set up so that the individual’s tax return is pre-populated with the IRP5 information submitted by the employer, and which cannot typically be deleted or amended. This demonstrates that it is not the responsibility of the individual to insert, or even consider and amend, the relevant tax information, and the individual is supposed to have her or his tax correctly calculated and documented in the IRP5, by the employer and Sars jointly. The employee having to consider and correct any such information is clearly an exceptional circumstance, not provided for in the Sars e-filing system.

If you have been retrenched in the last 12 to 18 months, there is a real risk that you may have been incorrectly overtaxed. A registered tax practitioner may be able to help you claim back any overpaid taxes.

  • By Patricia Williams

Patricia Williams is a tax dispute expert at Bowmans and chair of the Sait tax administration work group. 

Source: Money Web

Winter is coming – don’t get caught in the financial cold

Winter is coming. While we prepare to dig out the additional blankets and heaters, South Africans should remember to factor in the accompanying increase in monthly expenses that comes with the chilly period. Whether these are for medicines, gas or electricity, it’s easy for these costs to add up.

Unlike putting on a little extra winter weight – which can be swiftly dealt with in spring – additional expenses during the colder season demand immediate monitoring to prevent long-term impacts on your finances.

We all increase electricity consumption through the use of electric blankets, heaters, and the increased use of kettles, stoves and ovens to cook winter-warmer foods.  It is essential to factor this increased usage into our monthly budgets. The importance of this exercise is compounded considering the 5.2% electricity hike which kicked in on 1 April 2018.

We need to be aware of several other winter-specific factors. These include extra medical costs to combat the increase in the incidence of colds and flu during winter or a general increase in entertainment budgets, as indoor activities tend to cost more than outdoor options during the summer season.

5 tips to keep your bank account warm this winter:

1. Back the bargains

Take advantage of freebies and discounts this winter. Most medical aids and pharmacies offer a free or discounted flu inoculation and health screening to help you prevent illness and unwanted medical expenses. Check your policies for value-added benefits and make the most of bulk, bargain specials on winter food.

 2. Practise digital restraint and curb excessive online shopping

Avoiding the cold naturally means spending more time indoors, and often online and at home. This heightens the temptation to overspend on data costs, clothing and grocery shopping online. Make an effort to cut back on impulse purchases and only buy necessary items that are within your budget and be mindful of your data usage.

3. Stay close to home

Staying in helps cut costs, but this doesn’t mean you have to hibernate. Host a supper club, watch a movie at home instead of at the cinema, or rediscover old board games. If you must eat out, keep it pocket-friendly by tracking down the restaurants in your area that offer winter specials.

4. Chill-proof your home

Keeping heaters on for hours on end can be costly, so help ward off the outside cold by sealing leaky doors and windows with foam self-adhesive sealing strips. Warm up your living area by introducing plenty of hygge elements. Hygge (pronounce ‘hoo-gah’) is a Danish word that refers to the sense of warm cosiness you get from an abundance of fluffy blankets and pillows, soft candlelight, thick knitted socks and mugs of thick soup or steaming hot chocolate.

 5. Be in the know

With hundreds of free budgeting apps available, there’s no excuse for runaway expenses. Old Mutual’s free budgeting app, 22Seven, centralises all your accounts in one place and uses the data to generate a tailor-made budget that tracks your actual spending against what you planned to spend.

-By Tristan Naidoo

Tristan Naidoo is a legal adviser at Old Mutual Personal Finance. 

Source: Money Web

 

Six cappuccinos or a year off your home loan?

If you have R150 in your bank account once all your fixed monthly expenses have been paid, would you typically spend or save this extra amount? If you are like many South Africans, you’ll feel that R150 is just too little to make a dent in your home loan or retirement savings so you’ll end up spending it instead.

André Wentzel, Solutions Manager at Sanlam Personal Finance, begs to differ. “R150 can seem like such an inconsequential sum that people would rather use it for a few cappuccinos or to treat themselves to a takeaway dinner. But doing this means missing out on the opportunity to turn a relatively small amount into a larger long-term investment.”

Wentzel says, “It really helps to be able to visualise short-term rewards versus long-term pay-backs to understand the effect of compound interest and how small sacrifices now can make a big difference later.”

To practically demonstrate this, Wentzel decided to do the maths. Here’s what would happen if a person decided to invest the extra R150 in his or her future rather than on instant gratification:

1. Towards your retirement

If you save an additional R150 per month towards retirement, this will accumulate to between R400 000 or R500 000 in 30 years’ time, depending on what you assume the investment return to be. For example, an 8% return will yield R405k and a 9% return will yield R473k, after investment costs. (This also assumes that you increase the R150 per month in line with inflation each year.)

2. Towards your home loan

On a R700 000 home loan, assuming an interest rate of prime (10.25%), the monthly instalment for a 20-year loan will be R6 608 per month. When contributing an extra R150 each month, the loan will be paid off in around 19 years instead of 20 and you’ll save approximately R70 000 in interest over this period.

3. Paying off your credit debt

Paying off a credit debt of R15 000 over three years works out to a repayment of R525 per month (at an interest rate of 18% per annum). An extra R150 per month means you can pay it off nine months earlier, saving approximately R1 100 in interest.

Now, here’s what R150 could get you in the short-term:

  • 16 California rolls
  • 6 cappuccinos
  • 2 basic T-shirts
  • 2 movie tickets
  • 1 gigabyte of data

Wentzel says that practical exercises like this make the longer-term gains more concrete, “The trick to switching people’s thinking from a short-term bias to a longer-term one is to better articulate long-term goals and find ways to make these seem attainable.”

According to Wentzel, people with longer-term mind-sets typically have more retirement savings and are often better at managing credit. Additionally, being clear on their goals means that they’re frequently more active in finding ways to save and avoid expense creep.

TIPS ON LONG-TERM PLANNING

Wentzel’s three tips for shifting to a longer-term mindset are:

  1. Take the time to really consider what you want to achieve financially in the next five, 10, and 20 years. Compile a list of long-term goals and order these in terms of priority. Consider the potential trade-offs you’ll need to make for each goal. Then chat to a financial adviser.
  2. Use FinTech to budget better, track your expenditure, and visualise and articulate your longer-term savings and investment goals – and monitor these. If your investments aren’t performing, chat to your financial adviser and make a change, if necessary.
  3. Pick an appropriate savings vehicle for each goal based on how long you plan to save for, the likelihood that you’ll need to draw on those savings before the end of your planned savings term, and your tax circumstances. You also need to consider whether you can afford to consistently save the extra amount or whether you’ll contribute more erratically when funds are available.

More tips to save an extra R150 (or hopefully more) each month:

  • Wait 30 days before buying a non-essential item that’s over a certain amount – e.g. R500 or R1000 – to see if you still want it. If you don’t buy it, consider saving the money you would have spent.
  • Only buy what’s on the shopping list and consider online shopping for easy price comparisons between providers and to avoid the temptation of the mall.
  • Pack your own lunches and save what you would have spent on a meal.
  • Cancel unused club memberships and subscriptions and consider saving what you were spending.
  • Monitor your data usage, ensure you have a suitable data plan in place and reduce your consumption when possible, especially when you have regular access to free WiFi.

Source: IOL

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