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Tuesday, April 23, 2024

Tax- Income, Black or Pension?

The one thing all of us try to avoid, or at least reduce to the minimum, is paying any form of tax. Tax can take the form of a compulsory contribution that we all have to make from our salaries to the state coffers in terms of the Income Tax Act. It can also come in the form of the heavy demands that are sometimes based on unrealistic expectations placed on us as professionals by our close and extended family members, which is lovingly referred to in some communities as “Black Tax”. A third type of “tax” is the one our future, retired selves put on us today in the form of retirement fund contributions that we must make now to eventually have enough money to sustain ourselves when we are no longer willing or able to work.

In her article, “Black tax- burden or investment?” Zenkosi Dyomfana, Investment Manager at Investec Wealth & Investment, defines black tax as “the financial support that a professional or entrepreneur of colour is obligated to provide to their family on an ongoing basis outside of their own living expenses”. In terms of our common law, parents must support children, children must support parents, and spouses must support each other where one party has a basic need for food, shelter, medical care or education, and the other has the financial means to meet those needs. The challenge usually comes in the form of unrealistic expectations from extended family members who feel that they are entitled to enjoy some of the financial spoils of “the one who made it out of the township”.

In full disclosure, I was raised by an amazing, single, black mother who supported me financially to obtain two law degrees as a full-time student. She made personal and financial sacrifices to give me the opportunities in life that she never had, and I will forever be grateful to her. When she had to take early retirement from her teaching position due to health issues, I stepped up and assumed some financial responsibilities on her behalf. I have always considered it an honour to assist her where and when I was able to do so, and I have never considered it as a constraint on my ability to create wealth or to reach my financial goals.

So, does black tax hold professionals back from achieving their financial goals? In my opinion, it will depend on the ability of the black professional to manage expectations.

Firstly, you must manage your own expectations by targeting achievable financial goals. When competing in the marketplace with other professionals, black and white, who come from generational wealth, we sometimes create the unrealistic expectation of achieving generational wealth in one generation on a salary-based income stream. We want to buy the same house in the same area and drive the same car as our generational wealth beneficiary peers because we feel that we deserve the same lifestyle because we are paid the same salary, and we sometimes do not consider that those cars and houses might have been acquired with legacy income streams and assets and not with the salary that that person is earning.

Going into a debate concerning the reasons for past unequal income and wealth patterns can only lead to frustration and not to wealth creation.

Secondly, you must manage the expectations of your family members. One salary cannot sustain two or more households on the same level of luxury. Put differently, you cannot maintain the same lifestyle for your household, your parents, your uncles and aunts and your siblings on your salary alone. It is, therefore, important to manage the expectations that your extended family members might have of your ability to provide financial support to them. You can, at best, assist family members in meeting their basic needs if they are not able to provide for those needs themselves, but you cannot assist them to maintain the lifestyle that they want but cannot afford.

We often forget to consider that our older selves levy a tax on us in the form of provision for retirement. The contributions to retirement funds and the prudent management of our retirement savings will ensure that we are not financially dependent on our children or grandchildren when we are no longer able to earn an income. If charity begins at home, the first tax that we should take into consideration is the tax that we must levy on ourselves by ensuring that we contribute as much as possible to our retirement funds. This delayed gratification will have a positive impact by reducing the income tax that we must pay today, but it might also reduce the after-tax income we will have available to assist family members who are in need.

To strike the right balance between the amount of tax we pay to the state, to ourselves and to our family members, we need to take the following steps:

1. Calculate your financial resources and responsibilities:

  • What is my gross income?
  • What is my income tax liability?
  • What is my take-home pay?
  • What are my monthly household expenses?
  • How much do I want to save in my emergency fund
  • How much to I have left to assist family members
  • What are the financial needs of my family members?

2. Determine your financial goals:

  • How much do I want to save for retirement?
  • What is the ideal lifestyle that I can afford to maintain?
  • How much money do I want to save or invest?
  • To what extent can I contribute to the well-being of family members?

3. Balance conflicting interests and determine what is in the best interest of all parties:

  • Put yourself, your retirement and the needs of your household first.
  • Determine how much you can contribute to the needs of your parents.
  • Determine how much you can contribute to the needs of your siblings.
  • Determine how much you can contribute to the needs of your extended family members.

4. Have honest conversations:

  • Be honest with yourself by setting high, but achievable financial goals.
  • Communicate your financial ability and goals with your spouse, partner and children.
  • Communicate the extent to which you can assist financially to the relevant family members.

5. Execute:

  • Stick to your plan and negotiated payments.
  • Where you receive additional income on an ad-hoc basis, for example, a bonus, contribute to your retirement fund first, then to your household needs, and thereafter to the financial needs of family members.
  • Hold your family members accountable. You do not have the resources or responsibility to resolve every self-inflicted financial crisis that every family member creates.
  • Learn to say no. You are not a registered credit provider in terms of the National Credit Act. You are, therefore, not allowed to grant loans to family members and friends. Every loan you make to a family member or friend is, therefore, a donation, and you will never have the legal right to claim it back if they decide not to pay you back.

Paying tax is less painful when you have a plan in place to manage your tax liabilities effectively that takes your income, obligations and financial goals into consideration. Without a plan, you will end up paying too much in income and black tax at the expense of saving enough for your carefree retirement.

* Ladouce is a pension funds lawyer and the author of Pensions for Palookas

PERSONAL FINANCE

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