What Makes Up a Refund?
Ever wondered why in one year you received a refund in and yet in the next year you are asked to cough up the money? Why the change from year to year if your salary has barely changed, has your employer not paid enough on your behalf?
As previously stated, a refund is an overpayment of taxes. So firstly, if no taxes were paid no refund will be received.
Secondly, your employer deducts your taxes every month from your salary and sends that to SARS on your behalf. When your employer deducts these taxes they are allowed to deduct certain contributions/expenses from your remuneration before calculating the tax applicable. These are expenses such as your retirement fund contribution. They also can deduct the allowable medical tax credit applicable to you monthly from the PAYE payable to SARS.
Why Your IRP5 Matters
Your employer then declares all these figures on your IRP5 and gives it to you as proof that these amounts were taken into account with your amount of remuneration. This is why your IRP5 is so important. So that the correct figures are used on your income tax return.
Let’s Look at an Example
If Kevin earned R150 000 (2020 year of assessment) of remuneration of which:
– R10 000 is a travel allowance for the year
– He contributes R9 000 to a pension fund
– He is the only person on his medical aid for the whole year.
His employer is allowed to deduct the R9 000 from his total remuneration (monthly) before determining the PAYE to deduct. The employer would also be allowed to deduct the monthly medical tax credit of R310 as well. So, in the end, the employer will deduct R7 080 from his remuneration for the year. This amount is determined by using the PAYE tax calculation of 18% (because of the tax bracket). Then less the rebate applicable and less the R310 x 12.
– The Perspective From SARS
Now following the same example but looking at it from a SARS perspective. Remember SARS now, recalculates everything on your return and assesses what the actual amount is that you owe. The employer was merely a provisional calculation.
On assessment, Kevin can claim the business travel expenses he incurred against his travel allowance. Therefore, he puts in a claim on his return. This claim reduces the R10 000 to R0. This reduces Kevin’s taxable income and now he owes R5 640. This amount is determined by using the tax rates applicable to his income. Remember Kevin paid R7 080 on his IRP5 but SARS has now said that actually he only owes us R5 640, therefore, the overpayment of tax of R1 440 is what is referred to as a refund.
So Why Does Your Refund Change?
As you can see the only reason, he received this refund was because he was able to reduce his taxable income. By doing this he paid less tax than he did through his employer. So, a refund is actually the difference of taxes that you owed on assessment and the taxes you already paid through your employer.
If you employer calculated everything correctly monthly, you will get no refund. If you don’t have anything to claim on your return that will reduce the taxes owed on assessment, then you will get no refund.As you can see above, there are many factors that come into play when calculating your tax refund and just because you made massive contributions to your retirement annuity or medical aid, this does not mean that you will be entitled to a refund from SARS. Wanting to understand your taxes more? Enrol in one of our courses or give us a call today!