Common Tax Mistakes and How to Avoid Them

 

By Stephan Joubert CFP®

 

Tax season - two simple words that can strike fear into the heart of even the most organized individual. The stress of sorting through countless receipts, deciphering cryptic tax codes and racing against deadlines can feel like an annual gauntlet. It does not have to be a nerve-wracking experience though! With preparation and some savvy tips, you can tackle tax season with confidence and ease. In this article, we'll delve into some common mistakes taxpayers make and provide practical steps on how to avoid them.

 

1. Failing to Declare All Income

Mistake: The South African Income Tax Act 58 of 1962 defines your gross income as the total amount, in cash or otherwise, received by or accrued to or in favour of a resident during a year or period of assessment, excluding receipts or accruals of a capital nature. Not declaring all sources of income, including employment, investments, rental properties, and other sources will lead to undeclaration penalties. This includes worldwide income.

Solution: Keep meticulous records of all income sources and transactions. Utilize tax software or consult with a tax practitioner to ensure you do not miss any income declarations.

 

2. Neglecting Deductions and Exemptions

Mistake: Overlooking deductions and exemptions such as medical expenses, retirement fund contributions and relevant expenses for commission earners whose commission income is at least 50% of their total income.

Solution: Stay informed about available deductions and exemptions, and make sure to claim them if you qualify. Keep records and receipts to substantiate your claims should you be selected for an audit.

 

3. Not Filing Tax Returns on Time

Mistake: Missing the deadline for filing tax returns. SARS has enforced a very strict administrative penalty regime with penalties ranging from R 250 to thousands of Rands per month for outstanding tax returns.

Solution: Mark tax return deadlines on your calendar and set up reminders. If you anticipate delays, consider seeking an extension or assistance from a tax professional.

 

4. Misclassifying Workers

Mistake: Misclassifying employees as independent contractors. An employee is generally defined as a person who works for another person or entity and receives remuneration. The relationship is characterized by control and supervision, where the employer dictates the manner, hours, and conditions of work. An independent contractor, on the other hand, is someone who provides services under a contract for services rather than a contract of service. They are not subject to the same level of control or supervision as employees and are responsible for their own tax obligations.

Solution: Understand the difference between employees and independent contractors under South African tax law. It is important to bear in mind that the foreign employment exemption (s10(1)(o)(ii)) is not applicable if you are regarded as an independent contractor.

 

5. Inadequate Record-Keeping

Mistake: Not keeping proper records of income, expenses, and deductions.

Solution: Maintain thorough and organized financial records. Consider using accounting software or reaching out to a tax practitioner to help manage your records accurately.

 

6. Tax Implications on High Cash Balance Investments

Mistake: Not understanding the tax implications of high cash balance investments and the interest earned. Interest is subject to an annual exclusion of R23,800 (taxpayers under 65) or R34,500 (taxpayers over 65), however excessive interest-bearing balances can cause major tax obligations if not managed accordingly.

Solution: Interest income from cash investments is subject to income tax at your marginal tax rate, which can be as high as 45%. To minimize tax liability, consider diversifying your investments into more tax-efficient options.

 

7. Not Contributing Your Maximum RA Contribution

Mistake: Not contributing the maximum allowable amount to your Retirement Annuity (RA).

Solution: The maximum tax-deductible contribution to an RA is 27.5% of your taxable income or R350,000 per year, whichever is lower. Make sure to contribute the maximum amount to take full advantage of the tax benefits.

By avoiding these common tax mistakes and following the practical steps outlined, you can ensure a much more pleasant tax season, potentially increase your tax refund or at least limit your tax obligations. The calculations and administration surrounding your tax return can be a daunting task, so as with any of the other financial disciplines, reach out to a registered tax practitioner to ensure that your taxes are addressed in the most efficient manner possible.

Read more about Ascor® Tax Services

 

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