How to prepare for 2025's Tax Season

As tax season approaches, South Africans should take the necessary steps to ensure that they are prepared, in order to minimize their tax liabilities, and steer clear of penalties from the tax authorities.

When preparing for taxes, the process will differ based on whether someone is a full-time employee, self-employed, or an investor.

Nonetheless, there are several general steps that everyone can follow to get ready for tax season.

To start, it's essential to be aware of important deadlines to prevent any repercussions from non-compliance. Stay informed about the latest changes in tax laws and understand how they might affect your tax situation.

Two important tax changes were made in 2024:

1. Section 12T(4)(a) of the Income Tax Act now allows for pro-rata application of the R36,000 annual contribution limit for tax-free investments if a person’s assessment year is less than 12 months.
2. Section 11F(2)(a) introduces pro-rata deductions for retirement fund contributions, with the R350,000 lifetime limit adjusted for shorter assessment periods.

Create a comprehensive list of all potential income streams and contributions made towards a retirement annuity, public benefit organization, and medical aid for the applicable tax year. It is essential for taxpayers to collect all relevant supporting documents to validate their income, allowable expenses, and contributions. This is especially important if the South African Revenue Service (SARS) selects a tax return for audit.

Here's a suggested list of documents that taxpayers need to gather, based on the income sources received and contributions made throughout the applicable tax year:

• IRP5/IT3(a) tax certificates, which can be requested from their respective employer(s) and where a lumpsum was withdrawn or transferred during the relevant tax year, taxpayers may request IT3(a) tax certificates from the relevant institutions/funds.
• Medical tax certificates received from your medical aid scheme.
• Retirement annuity IT3(f) tax certificates.
• IT3(b) and (c) tax certificates issued by any financial institution relative to any interest earned and/or returns earned from investments.
• IT3(s) tax certificates if any tax-free investment contributions were made during the relevant tax year.
• Section 18(A) tax certificates in relation to any donations made towards a registered public benefit organization.
• Completed logbook, detailing the business and personal vehicle kilometres travelled during the relevant tax year and a copy of the vehicle purchase document(s), outlining the vehicle’s model and registration information.
• Rental schedule and the relevant income and expenditure information/documentation in support of each rental declaration.

Seek guidance from a reputable tax firm or practitioner to ensure you declare your income in the most compliant manner and claim any applicable exemptions in accordance with the Income Tax Act. This is particularly crucial in assisting taxpayers in steering clear of simple and preventable mistakes when submitting their tax returns.

There are several errors that individuals often make when submitting their tax returns. Missing provisional and annual filing deadlines, failing to consult with tax practitioners about changes in income streams, employment, or marital status, and neglecting to keep accurate supporting documentation are frequent errors. Submissions that are incomplete or inaccurate may lead to SARS rejecting unsupported declarations, in accordance with section 102 of the Tax Administration Act.

Some taxpayers incorrectly believe they are not required to file a tax return if they haven't earned substantial income or if PAYE has already been deducted. Taxpayers must continue to uphold their compliance status, as SARS has the authority to impose administrative penalties for non-compliance, according to Chapter 15 of the Tax Administration Act.

Other errors include neglecting to report all earned income, claiming unauthorized expenses, and not complying with section 23(g) of the Income Tax Act, which forbids deductions for expenses that were not incurred in generating income.

Non-compliance can lead to significant repercussions for taxpayers.

• Administrative penalties may vary from R250 to R16,000 per month until compliance is met.
• SARS has the authority to impose interest on outstanding balances.
• Criminal prosecution for non-compliance could result in fines or even a prison sentence of up to two years.

Furthermore, failing to comply restricts the ability to secure tax clearance certificates or letters of good standing, which can affect eligibility for government contracts or specific loans.

Although many view tax season preparation as a tedious and intimidating chore necessary to avoid trouble with the tax authorities, effective preparation can offer a significant advantage: lowering your tax liability.

There are several strategies individuals can employ to achieve this. Utilize the allowable tax deductions, credits, and exemptions outlined in the Income Tax Act. Contributions to retirement annuity funds based in South Africa and donations to registered public benefit organizations are especially effective methods for reducing your tax liability.

Original authors: Thokozile Kumalo and Tshepo Thebyane, Tax Consulting SA