Tax Tuesday: RA allowance and capital gains tax

A question that we’ve come across several times—and one that also featured in The Fat Wallet Show —asks whether capital gains are included in the 27.5% tax deduction calculation.

In other words, whether the capital gains you earn in addition to your monthly salary is added to your taxable monthly income.

The short answer is yes. In this blog post, we will unpack the rules around the deduction and hopefully provide some clarity on the matter.

What is allowed?

During a tax year, individuals are allowed to deduct any amount contributed to any pension fund, provident fund or retirement annuity from their income. However, a deduction cap limits the deduction amount.

Deduction cap

The total deduction allowed in any tax year cannot exceed:

R350,000; or
A maximum of 27.5% of the individual’s salary or “taxable income”.

Income tax calculation flow example

It’s possible for your remuneration to be lower than your actual taxable income, as illustrated below:

Gross Income	All amounts received or accumulated by the individual, including amounts of a capital nature. Salary will fall into this category, but various other income streams also make up gross income.	R275
Exemptions	All amounts included in gross income that is exempt from personal income tax.	(25)
*Income (sub-total)*	Gross income less exemptions.	R250
Deductions	All amounts that can be deducted.	(R10)
Inclusions	All amounts to be included. This is typically the capital gain at the inclusion rate.	R45
Taxable Income		R285

Carry-over

If your pension fund, provident fund or retirement annuity contributions exceed the deduction cap in a tax year, it will carry over to the next tax year. This means it will be considered as an amount contributed in the new tax year.

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday. Don’t miss it!