When I just started working, I was amazed at how so many of my colleagues could bend their knees under the weight of a boulder of a bond just to own a home. The few of us who rented definitely had more spare cash to enjoy every month. Until someone pointed out (what should have been obvious) to me what happens to your rent at the start of every year and continues to do so for the rest of your life, while your home loan instalment stays fairly stable for 20 years and then disappears.

Our Renting or Buying a Home calculator illustrates this point. Yes, we’re not comparing apples with apples here, as rent is an expense with no reward other than a roof over your head for a month, while your bond repayment is an expense linked to the reward of owning a property somewhere in the future. But the calculator can show you instantly:

• how your rent will increase over the years
• the instalment on a bond amount that’s appropriate to your level of income
• the up-front costs associated with a property purchase

(If you don’t want to purchase such an expensive property as the amount for which the calculator shows your income may qualify, our The real price of property calculator allows you to enter your own amounts for the price of the property and the amount of the bond that needs to be registered.)

Many disciplined investors don’t buy the ‘as safe as houses’ investment adage, though. They prefer to rent for the rest of their lives (or until they have saved up a large enough deposit) and invest the amount by which a bond instalment exceeds the rent that they are paying.

If you download the Renting or Buying a Home calculator, you’ll see it will take approximately 12 years before inflation causes rent of R4 000 per month to catch up with a bond instalment on that same property worth, say, R940 000 (Cape Town prices). That’s assuming that the bond applicant earned R30 000 p.m. to qualify for a 100% home loan at the bond rate of 10%, and that rent increases by 7% per year.

In the scenario above, the tenant investor will therefore have excess money to invest over 12 years. By ‘excess’ we mean the difference between what her bond repayments would have been and the rent she actually paid. If she invested all the money that she saved by not buying a property, including the up-front costs related to the property transfer and bond registration, and that investment yielded 11% per year after tax, she can expect her investment amount to be worth more than R1.1 million after 12 years.

But there are other expenses which the calculator does not show. Tenants normally do not have to pay maintenance and rates and taxes, which could be substantial. Let’s assume these additional ‘homeowner costs’ start at R20 000 per year and increase by inflation of 6% per year. Because our disciplined tenant investor did not have these expenses, she could have invested these amounts in the same place where she earned 11% per year after tax, and these accumulated amounts would have been worth approximately R600 000 after 12 years. That leaves her with a total investment lump sum of about R1.7 million after 12 years of renting and diligently investing all the money that she saved by not having to pay bond instalments, the up-front fees of a property purchase, rates and taxes or maintenance.

It may look as if tenants have a point – until you look at what a home owner’s property may be worth after 12 years. If we assume that the capital value of property grows at 7% per year, the R940 000 property should be worth just over R2.1 million after 12 years.

This is a very specific scenario, and by changing a few assumptions or by choosing a very specific investment term, we could make either the tenant or the homeowner look like the cleverer of the two. The important points to remember are:

• Think long-term when you make a financial decision.
• Understand all the risks and future expenses associated with your decision.
• Don’t underestimate the power of either inflation or compounded investment returns.
• Be careful of sweeping statement. Do the calculations.

  

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Last year almost one million taxpayers did not submit a tax return because they earned less than R120 000 during the year. While many of these employees rightly rejoiced in the fact that they may stay below SARS’s radar, others sadly missed out on a welcome cash-back from the taxman. How can this be?

Employees who earn less than R120 000 per year, have a single employer, pay PAYE and have no additional income or deductions other than those on their tax certificates, do not have to submit a return. Unfortunately, many taxpayers are not aware that they have tax-deductible expenses that do not appear on their certificates. By not filing a return, they never inform SARS of the additional deductions and miss their refund. Their employers, unknowingly, have paid more tax on the employees’ behalf than was necessary.

There are many deductions that are outside the employer’s field of vision, but the most relevant ones are private retirement fund contributions, donations and medical expenses.

If the employer is unaware that the employee is contributing to his own retirement annuity (RA), for example, the deductible portion of the RA premium would not appear on the employer’s tax certificate. The deductible amount varies, depending on the size of the employeeís salary, and whether he’s also contributing to an employer fund, but the employee should be able to deduct at least R1 750 of his RA premium from his taxable income.

Donations to public benefit organisations (section 18A) can also be deducted, up to an annual limit. Many schools and churches are registered as section 18A organisations – you may be surprised at how the taxman rewards your generosity towards these institutions.

Wishing you something back at the end of this filing season!

I don’t know a single person who doesn’t enjoy getting something back from the taxman at the end of the year. But some prefer to stay as far below the taxman’s radar as possible – by not registering as tax payers or by not submitting a tax return. If you are one of these, you could be shooting yourself in the foot and robbing your own household of extra cash in the bank. Let’s look at a few scenarios where registering as a taxpayer or submitting a tax return could benefit either the household and/or the taxpayer.

In the first scenario a spouse is employed by the husband or wife’s business. The husband may be officially retired according to SARS’s records, but in reality receiving a salary – off the record – from the cash earnings of his wife’s business for administrating or supervising part of the business. The husband doesn’t want the hassle of submitting a tax return every year and has convinced his wife, the owner of the business, to not disclose his salary to SARS. Other than the fact that the non-disclosure of income is an illegal action, the husband could also be robbing his own household of after-tax earnings. In which circumstances would this be the case?

If the husband’s salary is disclosed in the business’s books, the business would be entitled to deduct that salary from its income, which results in a lower taxable income and less tax payable by the business every year. Even if the employee spouse now has to pay tax, that amount would be exceeded by the tax saving of the employer spouse in all circumstances where the employee spouse’s tax rate is lower than the employer spouse’s tax rate. The household (the employer and employee as a combined entity) will therefore be left with more after-tax income by disclosing the salary.

There are a few administrative hassles, though. In the scenario above, the wife would have to register with Revenue as the employer of the husband and contribute 1% of his salary to UIF every month and the husband will also sacrifice 1% of his salary (capped at R125 per month) to UIF. If the salary exceeds the 2009/2010 tax thresholds (R54 200 for persons under the age of 65 and R84 200 for those above 65) the wife would also have to deduct PAYE and/or SITE from the salary. If the husband earns less than these thresholds, he would not have to be registered as a taxpayer with SARS, but the business still enjoys the tax relief of deducting his salary from its taxable income.

To prevent businesses from abusing the potential tax relief associated with employing spouses, the Income Tax Act stipulates that only the payment for services by a spouse that truly contributes to the trading income of the business may be deducted as business expenses. The Act also specifically prohibits the deduction of any domestic or private expenses. In the scenario above, it would therefore not be possible for the wife to deduct payment to the husband for moving the lawn of their private residence or for managing their household chores. Excessive salaries will also raise a flag with SARS. If you pay your spouse a salary that is higher than the going rate in the market for similar services, SARS may disallow that business deduction.

But if you are truly employed by the business and paid a market-related salary, disclosing your income could be a relatively easy and painless way to leave you, as a couple, with significantly more after-tax income at the end of the year.