2020 was an unprecedented and challenging year for many taxpayers and in some cases, many relied on multiple sources of income to stay afloat. There is a real danger with multiple sources of income if you don’t keep track of your overall tax liability and you could be in for a surprise when completing your tax return.
In this article, we share a couple of examples and highlight elements to bear in mind and to be careful of.
Multiple Sources of Income – Tax Complications
Below is an example of a tax scenario resulting in a tax shortfall where multiple income sources are involved and we also highlight how SARS obtains the information:
|Source of Income||How SARS knows||Annual Amount||Tax Due||Net|
|Remuneration from Employer||IRP5||R 540 000 (R 45 000 p/m)||R 124 635.00||R 413 580.00|
|Income from a Pension Fund||IT3 (a)||R 240 000 (R 20 000 p/m)||R 30 970.00||R 207 245.00|
|Income from property rental||Declared on ITR12||R 150 000 (R 12 500 p/m)||R 12 042.00||R 136 458.00|
|Total Taxable Income||R 930 000 (R 77 500 p/m)||R 167 647.00||R 757 283.00|
|What you should have paid||On Assessment!||R 279 133.00||R 649 102.00|
The result = R 111 486 Tax Shortfall!
Why the shortfall?
- we use a progressive tax system, i.e. the more you earn the higher tax you pay!
- individual items are taxed in different (specific to income level) brackets.
- each item of income gets the benefit of the rebate (R 14 958 for under 65’s).
Below is the calculation of what happened because each of the income sources were taxed individually (not combined and taxed in the overall tax bracket) and the rebate was applied 3 times as opposed to only once.
|Income||Tax (2021)||Rebate 2021||Net|
|R 150 000||R 27 000.00||R 14 958.00||R 12 042.00|
|R 240 000||R 45 928.00||R 14 958.00||R 30 970.00|
|R 540 000||R 139 593.00||R 14 958.00||R 124 635.00|
So how do we overcome this?
- SARS has put out some guidelines on how much additional tax can, on request by the employee, be deducted – either:
- a Rand value in line with the tax tables, or;
- a % value in line with the tax tables.
- There is an indicator (code 3195 – Voluntary Over Deduction) on the IRP5 which highlights that the employee has paid more tax in relation to the remuneration detailed on the IRP5.
- The Voluntary Over Deduction will be included in the total PAYE paid. (code 4102 – PAYE)
- Payments from pension fund companies:
- generally, they include the rebate when doing the tax calculation of a pension payment. (i.e. the taxpayer benefits!)
- their systems don’t cater for switching off the rebate calculation. (SARS is looking into this strategically – e.g. via the possible submission of more regular information). The vast majority of payments they make are to individuals who only get a pension payment (i.e. are no longer employed and thus don’t get any remuneration), and that’s why their default is to include the rebate.
- do a sanity check on the tax paid vs. the tax due by combining remuneration and any other income received that is taxable – your payroll manager or accountant can assist.
Other ways of overcoming this problem:
- Provisional Tax Payment. Individuals receiving income over and above traditional remuneration would need to pay tax via the provisional tax system (on a periodic basis) to ensure that on assessment the tax due on this type of income is “squared up”. If not, SARS may raise penalties and interest. Examples of types of income to consider:
- Interest earned – remember that there is an exemption of R.
- Rental income – reduce by legitimate and allowance expenses.
- Get advice on other income like certain share payments, Capital Gains Tax, etc.
What happens if we don’t – i.e. the consequences?
- A Tax Shortfall on Assessment will occur!
- Taxpayers have not “budgeted” for this so it’s a surprise.
- Many can’t afford the lump sum.
- Many ignore and then fall foul of SARS – often leading to further audits.
- The Debt collection process, i.e. AA88 is often instituted.
Always seek the advice of a professional when dealing with “out of the ordinary” tax scenarios or where multiple sources of income are concerned. We have many professionals that can assist you with this. Click here to contact one of our trusted Associates.