'Tax exemptions' and 'tax rebates' are terms that are often used interchangeably, with the average person unable to differentiate between the two. Let's demystify these...
Tax exemption and tax rebate are two different concepts in taxation:
Tax Exemptions:
A specific amount of income or type of income that is not subject to taxation. This means that the individual or entity receiving the income does not have to pay taxes on that portion of their income. Tax exemptions can apply to various categories such as certain types of investment income, charitable donations, or specific groups(e.g. pensioners)
Examples of exemptions
Interest income - exemption on the first R23 800 earned
Earned Income - R95 750 exemption, with additional exemptions for senior citizens
Capital Gains Tax - exemption on the first R40 000 of profit earned from the sale of an asset
Donations tax - Exemption on the first R100 000 donated
Tax Free Investment/Savings Accounts
Tax Rebates:
A refund or repayment of taxes that have already been paid. It is typically given by the government as an incentive or relief measure. Tax rebates can be provided for various reasons, such as stimulating spending and productivity during an economic downturn, or encouraging certain behaviours (e.g. investing for pension or investing in renewable energy projects ).
Examples of rebates
rebate on contributions to pension/retirement funds
rebate on investments made into renewable energy projects(solar panels, sun exchange, Fedgroup, etc)
In summary, tax exemptions reduce the taxable income, while tax rebates provide refunds or repayments of taxes that have already been paid.
How To Think About Exemptions & Rebates In Your Money Approach
Both are mechanisms used by governments to influence behaviour, provide relief, or promote economic growth.
Exemptions are usually straight-forward and usually do not have any hidden agendas. The most common mistake I come across is that people tend to limit their investing benefits to the level of the exemption, rather than their own lifestyle needs. e.g. I won't generate more than R23 800 in interest income because I will be taxed on the additional. If we applied the same logic to earned income, the same individual should not want to earn more than R95 750 per annum, as it will attract income tax. A bit irrational if you ask me.
Utilise your exemptions, but do not let them dictate your behaviour
Rebates usually have a trade-offs that may not be obvious to the average person. e.g. when talking about contribution to a retirement annuity, most people just think of the tax refund they will get, rather than the implications applicable to the money contributed, mainly;
you deprive yourself access/use to the contributed money until retirement stage
you defer tax on a small amount, but will be taxed on a much bigger amount
you live a life of debt, when having access to the money contributed could help you improve your quality of life
Some questions to ask about rebates:
What is the cost?
What is the behaviour being encouraged? Why is the behaviour being encouraged?
Does the behaviour and underlying investment align with my investment strategy and goals?
Can I make better use of the funds?
One you have made your thorough analysis, you can decide whether to align yourself with the rebates, and to what extent.
Does this help improve your understanding of rebates and exemptions? Which rebates do you use in your money game? I would love to hear from you...
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