Auto-assessments and Two-pot Withdrawals: Watch Out for Tax Implications

According to Thys van Zyl, Chief Executive Officer of Everest Advisory Services (Pty) Ltd (FSP 49495, CAT I), many South Africans view tax season as nothing more than an annual administrative exercise. In reality, it provides an opportunity to conduct a comprehensive review of one’s overall financial position.

“Tax season should not simply be seen as another form that needs to be completed. Taxpayers who receive auto-assessments should carefully review their income, deductions, medical tax credits, investment income, retirement fund contributions and any two-pot withdrawals before accepting the assessment.”

Van Zyl says the growing use of auto-assessments has simplified the administrative process, but it has not reduced the taxpayer’s responsibility.

“The South African Revenue Service’s (SARS) systems are far more advanced today and make use of information submitted by employers, banks, medical schemes, retirement funds and other third-party data providers. However, taxpayers should view an auto-assessment as a draft assessment rather than a final tax calculation. If any information is missing or incorrect, the tax return should be amended and submitted.”

According to Van Zyl, many taxpayers mistakenly assume that an auto-assessment is always complete and error-free.

“A simpler process does not mean less responsibility. The ultimate responsibility for ensuring that all income, deductions and tax information are complete and accurate still rests with the taxpayer. Take the time to review your assessment carefully. Those few extra minutes could save you significant money, time and unnecessary administration later.”

Van Zyl says the two-pot retirement system has also introduced a new tax risk that many people may not yet fully understand.

“For many taxpayers, this may be the first tax season in which the full tax implications of withdrawals from the savings component of the two-pot retirement system are reflected in their tax records. The biggest misconception is that such a withdrawal is tax-free emergency funding or simply a bonus. That is not the case.”

He explains that withdrawals from the savings component form part of a person’s taxable income.

“When your annual tax assessment is calculated, your total taxable income may still be higher than expected, which could result in an additional tax liability. While the two-pot system may help relieve short-term financial pressure, every withdrawal carries tax consequences and may simultaneously reduce the future compound growth of your retirement savings.”

Van Zyl says taxpayers should carefully compare their tax assessments with their own supporting documentation.

“Make sure that your IRP5 and IT3 certificates, medical scheme contributions, retirement fund contributions, investment income, rental or freelance income, and any two-pot withdrawals are correctly reflected on your tax return. Even small discrepancies can ultimately have a significant impact on your final tax assessment.”

“Every withdrawal, deduction and investment income item forms part of your broader financial picture. Tax season should therefore be viewed as an annual financial review rather than merely an administrative deadline.”

Van Zyl also points out that tax season is a popular time for criminals to target unsuspecting South Africans through scams.

“It is important to be especially cautious of phishing emails and SMS messages, and not to click on links indiscriminately. Only use official SARS platforms and ensure that you are dealing with an authorised person. Remaining vigilant is essential.”