Over the past year, the finance minister has made a number of tax changes that will have a material impact on taxable incomes. While you may be celebrating lower tax rates, the government is starting to squeeze the items that can be used as tax deductions, including medical aid contributions and travel allowances.
According to Doelie Lessing, director at Werksmans Tax, now is a good time to start reviewing your situation in preparation for the new tax year. Not only is your tax burden likely to increase, but you need to ensure that you comply with the new rules.
Most people will be affected by the change to the tax treatment of medical aid contributions as from March 1 2006. According to Lessing, employees currently do not pay fringe benefit tax on the first two-thirds of their medical aid contributions paid by the employer.
For example, if your contribution is R2 700 a month to a medical aid for a family of four, and it was paid for by your employer, R1 800 did not attract fringe benefits tax, which means that it was paid out of pre-tax money.
Now the government has imposed limits. Tax deductible and/or fringe benefit tax-free contributions for the main member and first dependant are limited to R500 each and R300 for each subsequent dependant. So a family of four can now only deduct R1 600 from their taxable income or contribute R1 600 out of pre-tax money if the contribution is paid by an employer.
At the same time the government has increased the level of medical expenses you have to incur before you can claim a tax benefit, said Lessing. Currently, you can claim a deduction on medical expenses that exceed 5% of your taxable income. That percentage has increased to 7,5%.
So, for example, after receiving a tax deduction for your pension and car allowance, your taxable salary is R100 000. If your medical expenses for that year came to more than R5 000, for example R6 000, you could claim R1 000 as expenses on your tax return. As from the next tax year, you will have to clock up R7 500 of medical expenses before you can start to claim additional expenses. The deduction is only available for expenses not covered by your medical aid.
Travel allowances have also been under attack from the minister, who believes there is a great deal of abuse, with people claiming personal travel as business travel.
According to Lessing, in the 2005 tax year, in the absence of an accurate logbook to record business travel, the number of kilometres deemed as private travel increased from 14 000km to 16 000km. For the next tax year, it will rise to 18 000km.
Every year when the deemed private usage increases, so the tax benefit from your travel allowance decreases. Even when a logbook is kept and actual business travel expenses are claimed, the maximum value of a vehicle when calculating costs is R360 000, so a new top- of-the-range BMW would no longer be a tax perk.
People who utilise company cars currently pay fringe benefit tax on 1,8% of the determined value of the car. In the next tax year that will increase to 2,5%. So if your company car has a determined value of R200 000, your fringe benefit is about R3 600 a month. If you have a tax rate of 40% you would be paying R1 140 of additional tax. From the next tax year, the fringe benefit will increase to R5 000 and your tax payable jumps to R2 000 a month.
But people who work from home have been given a break. If your salary is based on commission or is performance-related but still constitutes “remuneration” for employees’ tax purposes, because the commission is paid at regular intervals and your home office is the primary place where you conduct your work, you could be entitled to deduct the expense of running your office from your taxable income.
Lessing said that while individuals need to review their situation, the South African Revenue Service is likely to pursue employers for under-deduction of employees’ tax if the increased PAYE is not withheld. “Employers therefore need to ensure that their payrolls are amended accordingly.”