Smart spending: Spending your SARS tax rebate

The year 2017 is here and with a renewed  sense of excitement and anticipation. You’ve worked hard and, hopefully, been duly rewarded! One thing is for sure, if you’ve been diligently paying your taxes like the upstanding citizen that you are, you’re in for a little cash injection in the form of your SARS tax rebate.

For those not quite in the know, your tax rebate/refund is essentially the result of SARS acknowledging that you’ve paid more taxes during the year than you should have, and the government is liable to pay you back for an interest-free loan. Your refund is linked to your earnings and income tax threshold. It is a  welcome boost and feels like a fair reward for complying with the law and keeping up to date with your taxes.

As with any extra cash, there’s always the temptation to splurge and spend it on something extravagant. Those new sneakers or that beach holiday you’ve been dreaming of. There are far more beneficial and practical ways to spend or invest this extra cash that will benefit your financial prosperity in the long term.

So in the interest of helping you use this bonus cash wisely, we’ve identified a smart spender solution for your SARS tax rebate.

Start building your nest egg

We mentioned looking long-term for your rebate spend, and this definitely qualifies! Thinking about retirement is off-putting for some, particularly if you’re still in the early stages of your career or find yourself within that 20’s year bracket. The thought of hoarding away money for 40+ years down the line is almost akin to punishment to some, but the truth of the matter is, it’s never too early to start planning for your retirement.

Investing your tax rebate into a Retirement Annuity (RA) might just be the best decision you ever make, and in the future you will be ever so grateful. A Retirement Annuity is essentially a fund into which you deposit a set monthly amount or a lump sum until you reach retirement age (usually around 55), at which point you can withdraw up to one-third of the investment value (which will have grown significantly with time and interest) as a lump sum, and the balance will be taken as monthly income that essentially constitutes your ‘salary’ when you retire.

Your RA payments are tax deductible, subject to a maximum of 27.5% of your  gross remuneration or taxable income (whichever is greater) and an annual cap of R350 000. This will in turn result in a larger tax rebate when you next submit your tax return. So if you get into the habit of reinvesting your tax return amount into your RA each year, by retirement age your RA will have grown significantly and you’ll find that your twilight years are far more comfortable. Make that smart choice!

So no matter how you choose to spend your tax rebate this year, make sure you’ve weighed up the options and don’t just spend for the sake of spending it.

Find out more about the Absa Retirement Annuity here