Tax Brackets in South Africa: A Taxpayer Guide
South African residents pay tax on worldwide income, while non-residents pay tax on their income derived in the country. All foreign taxes paid are credited. Equal tax rates apply to both residents and non-residents.
Learning ways to boost your income is essential for both personal and a country’s growth.
Tax revenue for the government comes mainly from personal and corporate income taxes, as well as from a small percentage of the population due to extreme income inequality. Tax statistics show about twenty-two million of South Africa’s 58 million residents pay taxes.
In this article, we'll cover everything you need to know about the tax brackets in South Africa.
Here’s What We’ll Cover:
How Tax Brackets Work
Every year, the South African Revenue Service (SARS) increases the tax brackets to account for inflation and prevent tax bracket creep, or tax brackets getting pushed up without taxpayers earning more.
Many employees are confused about tax calculation and worry once tax bracket limits aren't adjusted to keep up with inflation. With a little professional tax training, employers can help motivate their employees and overcome this concern.
What Is Bracket Creep?
Generally, bracket creep occurs when an employee's income moves from one tax bracket to another as their income increases. Tax brackets were adjusted for inflation in the past to ensure that people remained in the same tax bracket.
Despite their relatively low purchasing power, the South African Revenue Service sees them earning more and taxes them accordingly.
An Equitable Tax System
Most workers believe that their entire income is taxed based on their tax bracket. In each bracket, a certain percentage of the employee's salary is taxed at the rate indicated.
SARS calculates a base tax amount for each bracket, equal to the sum of all previous brackets' taxes.
As a result, bracket creep only impacts the portion of income that strays into a higher tax bracket. In that case, a person who earns R100 over the next tax bracket will only pay taxes at the higher rate on that R100.
How to Effectively Use Tax Brackets in Business
Tax brackets may differ depending on whether you are a Sole Proprietor, a Corporation / Close Corporation, a Trust, or a Small Business Corporation.
Here are a few tax brackets for business owners:
- Sole proprietors pay taxes according to their tax brackets.
- The Small Business Corporation tax brackets apply to small business corporations.
- Companies and close corporations get a 28% tax rate, and trusts get a 45% tax rate.
A sole trader's taxable income determines how much tax they must pay. You can inculcate smart strategies to lower your self-employed taxes. Your taxable income is your profit from the business less any taxable deductions that you are entitled to under the law. Retirement annuities, donations to Public Benefit Organizations, and medical expenses are just a few of the deductions you can claim.
South Africa views private companies as legal persons. You will owe tax on your Net Profit (excluding capital gains) less qualifying deductions and special allowances when you are a corporation, close corporation, personal liability company, or SBC.
Tax on Goods and Services in South Africa
In South Africa, VAT is levied on the purchase of goods and services. The current tax rate on most goods and services and imports is 15%, but there are some exceptions, such as financial services.
Businesses can charge their customers VAT on the cost of goods and services they invoice.
Additionally, if a company's annual turnover exceeds R1 million in 12 months, it must register for VAT.
Visiting tourists and diplomats are eligible for VAT refunds. To qualify, you will need to hold a non-resident foreign passport or be a South African citizen now living abroad.
Who Must Pay Tax in South Africa?
You must pay taxes in South Africa if you:
- Are a permanent or temporary resident of South Africa, with either citizenship or a residence permit.
- Have lived in South Africa for more than 91 days in each of the last five tax years and for at least 915 days over those five years.
- You own a home in South Africa. In paying capital gains tax on property, all homeowners (even non-residents) must register with SARS.
- Have foreign employment income over R1.25 million as a tax resident.
Certain circumstances may exempt you from these regulations, such as if you are elderly and make less than a certain amount.
How South Africa’s Tax System Works for Foreigners
South Africa levies the same income tax on foreigners as it does on locals. Several countries have tax treaties with South Africa, including Australia, Japan, Sweden, Thailand, the United Kingdom, and the United States, which can help you avoid double taxation.
According to the tax tables for that year, a tax resident who earns more than R1.25 million in foreign employment income in 2020 will be taxed. During the assessment year, residents who spend more than 183 consecutive days outside of South Africa in any one 12-month period are subject to this requirement.
South Africa does not tax international pensions. The tax rate on local pensions depends on whether it is a lump-sum or an annuity. South Africa is a member of the Automated Exchange of Information (AEOI) system, a global standard that cracks down cross-border tax evasion.
Withholding Tax on Interest or Royalties
Interest or royalties paid to or for the benefit of a foreign person outside South Africa are subject to these taxes. The tax rate is 15% in South Africa. Although the foreign person is responsible for the tax, the person making the payment must withhold it. However, there are some exceptions.
How to File Your Income Tax Returns in South Africa
When people file their tax returns, the tax season occurs from July to November, depending on how they file.
Any taxes not deducted through the Pay-As-You-Earn (PAYE) system will be an amount due here.
Even though every US citizen and Green Cardholder must file a tax return with the IRS even when living abroad, many expatriates fail to do so. Some expatriates do not realize these obligations, believing that they do not need to file tax returns or pay taxes in the United States. However, in reality, they are required to do so!
Tax payments can be made to SARS using any of these methods:
- At the bank
- Via SARS E-filling portal
- Via electronic fund transfer
Failure to file your tax return can result in a penalty of R250 to R16,000 for each month you fail to do so. Also, a new law in 2021 made tax neglect a potential criminal offense, punishable by up to two years in prison.
Tax on Property and Wealth in South Africa
Here are some other taxes individuals pay:
Tax on Rental Income
On your income tax return, you should declare any income you receive from a rental property. Taxes apply to this income, but you can deduct certain expenses from your taxes, such as agent fees, insurance, and advertising.
Transfer duty applies to any property acquired in a sales transaction. The purchaser of the property must pay transfer duty within six months of the acquisition date to avoid incurring interest charges.
It is a South African property tax payable on any donated property. For properties worth up to R30 million, the tax is 20%, and for those worth more, it is 25%. The donor is responsible for paying the tax.
Several exemptions apply, including if the property recipient is a spouse, a segment of government, or a public benefit organization. Individuals and businesses are exempt from paying income tax if their yearly donations do not exceed R100,000.
In the event of their death, retirees in South Africa pay estate duty on their property, no matter where it is. If the property was acquired before residency or was inherited or donated by someone not a South African resident, it is exempt.
The rate of estate duty on an individual who dies while, ordinarily, residing in South Africa is 20%, with a standard deduction of ZAR 3.5 million. There are other deductions available, including the deduction for assets that accrue to the surviving spouse. If you die while not residing in South Africa, estate duty is also payable on your net South African positioned estate.
South Africa Corporate Income Tax
The corporate income tax rate in South Africa is 28% for corporations and 33% for branches. Profits earned by a company are subject to income tax, including trade income, passive income, and capital gains. To reduce taxable income, one can deduct expenses incurred in producing income.
In South Africa, dividends received from another South African company are exempt from corporation tax. However, Secondary Tax on Companies is imposed on the payer (subject to an exemption) based on the net amount of dividends declared.
Gains on the sale of substantial foreign shareholdings are exempt if certain conditions are met; however, gains on all other capital gains are taxed at the normal income tax rate.
A South African resident holding company may qualify for a participation exemption if it disposes of a substantial shareholding in a foreign company other than a "foreign financial instrument holding company.” South African companies are exempt from this if they own 20% or more of equity shares and voting rights in a foreign company for 18 months before disposing of them to a nonresident.
For small business corporations, incentives include preferential corporate tax rates, R&D deductions, employee housing allowances, depreciation allowances, and public-private partnerships.
Skills Development Levy: Employers are required to pay this tax to promote the learning and development of employees in South Africa. If an employer's total annual salary bill exceeds R500,000, they are liable for this tax.
The employer pays 1% of the total salary bill.
Security Transfers Tax: This tax is imposed at 0.25% on every transfer of stock or depository receipt in a company or a member's interest in a close corporation.
Turnover Tax: An alternative, simplified taxation method for small businesses with less than R1 million annual turnover. Although VAT can still be retained, it replaces income tax, capital gains tax, dividend tax, and VAT in South Africa.
Import and Export Taxes in South Africa
Taxes paid on imports and exports in South Africa are listed below:
Import taxes are imposed to raise revenue and protect the local economy. Usually, this tax is added to VAT and is calculated as a percentage of the goods' value.
Taxes on certain food, drink, textile, and firearms products are based on volume.
Excise Duty and Levy
It is a tax imposed on certain high-volume daily consumables (e.g., petroleum, alcohol, tobacco) and certain non-essential and luxury items (e.g., electronic equipment, cosmetics).
The purpose of this tax is to discourage the consumption of environmentally harmful products and raise revenue. Rates vary depending on the product.
Other Indirect Taxes
You should be aware of these indirect taxes too:
Unemployment Insurance Fund: This fund pays unemployment benefits to people who have been employed for at least 24 hours per week and become unemployed, sick, or on maternity leave.
Employees contribute 2% of their salaries toward this short-term benefit (1% by the employer, 1% by the employee). Employers are responsible for paying this to SARS from employee salaries each month.
Fuel Tax: This tax is imposed on fuels such as gasoline and diesel. After the most recent fuel hikes, the tax has fluctuated but is currently around 40% and included in consumers’ fuel costs.
You can now request specific Personal Income Tax-related services by sending an SMS to SARS on 47277. The following additional tax-related services are offered via mobile devices. You can access these services with or without data/airtime:
- Use the following information: Booking (Space) ID number/Passport number/ Asylum Seeker number to request an appointment.
- To request confirmation regarding submitting a PIT tax return - File (Space) ID number/Passport number/ Asylum Seeker number.
- To request the issuance of a tax registration number- TRN (Space) ID number/Passport number/ Asylum Seeker number.
- To request account-related queries such as balance statements or provision of a statement account - Balance (Space) ID number/Passport number/ Asylum Seeker number.
The tax rate is the percentage at which an individual or corporation is taxed. Thus, a progressive tax rate results in a higher amount collected from taxpayers with higher incomes.
Tax brackets are critical in helping taxpayers understand the tax impact of their financial decisions and ensure they are compliant with the laws.
You may find taxes confusing, especially when you have moved to a new country and need to get used to their tax system.
There is professional help available. You may want to hire an accountant if this is your first time filing taxes in South Africa. If you're establishing a company in South Africa, you should seek independent financial advice regarding your business tax liabilities.
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