Making sense of your IRP Part 4: Claim those tax deductions

Steven Jones - Moneyweb Tax

Don't be disappointed, get the tax deductions you desire. Here's how...

The previous three parts of this series have dealt with earnings codes, but deductions are also vital to get correct on your IRP5 certificate. If the wrong code is used, the South African Revenue Service (Sars) may end up disallowing your deduction.

4001 / 4002 Pension fund contributions (current / arrear). Your current pension fund contributions are deductible up to 7,5% of income derived from retirement-funding employment (the income taken into account for determining fund contributions), while an additional R1 800 per annum may be deducted for past, or "arrear" contributions.However, even if your contributions exceed the deductible limits, the full amount must be shown under the relevant code. Any non-deductible amount is carried over to future years, and ultimately the non-deductible portion is treated as tax-free when you eventually retire.

4003 / 4004 Provident fund contributions (current / arrear). Although provident fund contributions made by employees are not deductible in their hands for tax purposes, the contributions must nevertheless be recorded on the IRP5 certificate. Upon retirement, such contributions are repaid tax-free.

4005 Medical fund contributions. Employee contributions to medical funds are disclosed here. If you are under the age of 65 years, and your employer contributions do not exceed the monthly tax-free "caps", any unused balance is deductible in full by the employee. Employee contributions in excess of the "caps" are still deductible, but are subject to the 7,5% rule, whereby medical expenses are reduced by 7,5% of taxable income.

If you are over the age of 65 years, or you or an immediate family member is "handicapped" (as defined in the Income Tax Act), medical fund contributions are fully-deductible.

4006 / 4007 Retirement annuity fund contributions (current / arrear). Although retirement annuity fund contributions are normally paid directly to the fund by the employee, the employer is entitled to take such contributions into account for employees' tax purposes, up to certain limits.

If you are not a pension or provident fund member, you can deduct up to 15% of your income, whereas if you are a member of such a fund, your deduction is generally limited to the greater of R3 500 less pension fund contributions, or R1 750. You can however still deduct 15% of income not taken into account for pension or provident fund contributions (i.e. your so-called "non retirement-funding employment" income).

4018 Premiums paid for loss of income policies. Income protection policies are tax-deductible, and the employer is once again entitled to take these contributions into account.
4101 SITE (Standard Income Tax on Employees). This is the portion of employees' tax deductible on the first R60 000 per annum for employees in so-called "standard employment", which covers most normal employment.

4102 PAYE (Pay As You Earn). Employees' tax on income exceeding R60 000 per annum is classified as PAYE, as well as employees' tax deducted from directors' remuneration, any allowances, and income paid to labour brokers or personal service companies.