Should you build your emergency savings or pay off your car loan?

If you’ve recently come into some extra money, perhaps from a raise or bonus, you might wonder the best way to maximize your surplus funds. Saving is an obvious choice, especially for those who don’t have a few months’ worth of living expenses stashed away.

But you might also consider tackling a big regular expense, like your auto loan. Car owners currently owe $1.18 trillion on their auto loans, according to a 2019 study from Experian, averaging $32,187 for new and $20,137 for used cars. Making extra payments toward a car loan could go a long way to helping you become debt free.

While it’s always smart to aggressively pay off high-interest obligations, like credit card debt, as soon as possible so you pay less in interest over time, paying off other forms of debt shouldn’t necessarily take precedence over padding an emergency fund, Christian Patterson, wealth advisor at Exencial Wealth Advisors, tells CNBC Make It.

If you’re debating between paying off your car or increasing your savings, here’s what to keep in mind.

The case for saving before paying off debt

If you don’t have much in the way of savings, research from economists Emily Gallagher and Jorge Sabat suggests aiming for roughly $2,500 to get you started. That’s enough to feel relatively stable, the researchers found, and cover many emergencies that might arise so you don’t have to rely on credit. Keep it in a high-yield savings account with an online bank, which typically offer better interest rates than brick and mortars.

Then you can focus on paying off any debt with an interest rate above “5-ish%,” writes Rachel Sanborn, director of advisory services at Ellevest, an online investment platform.

Once the high-interest debt is paid off, put any surplus funds toward additional padding for your emergency fund. Experts say three to six months’ worth of take-home pay is the ideal, but save as much as makes you comfortable.

If you’re a freelancer or small business owner, for example, you might prefer to have six months to a year’s worth of monthly expenses stashed away. If you have a relatively stable job and earnings, you might be okay with a bit less. Once you make that calculation, you can tackle any remaining lower-interest debt, of which your auto loan is likely a part.

The interest rate on your car loan depends on a host of factors, including your credit score. But the average rate for a new car loan is around 5.7%, according to Edmunds. That puts it on the edge of Sanborn’s 5-ish% rule. Still, 5.7% is low enough that you can likely feel okay about saving any surplus money over paying down your loan sooner. Plus, continuous on-time bill payments each month can boost your credit score (not that adding a few points to your score should be your sole consideration, especially if paying your debt down quicker could save a lot of money on interest).

“Building an emergency savings fund is an important personal finance pillar,” Amy Thomann, head of consumer credit education at TransUnion, tells CNBC Make It. “If you feel as though you have a good repayment schedule in place for your auto loan, you may decide to put the cash into a savings account. This can help limit the need to use debt to finance an unexpected, large expense in the future.”

If you have a solid emergency fund, and you’re deciding between paying off your car loan or investing for retirement, Patterson, of Exencial Wealth Advisors, says that the math likely favors investing, assuming your auto loan rate is relatively low. Historically, the stock market has returned around 10% on average, though experts expect that to decrease in the future.

“The difference in the percentage rate on your loan and the return from your investments would be the ‘opportunity cost,’” says Patterson. “If your car loan is at 1.9% APR, but you could earn a 6% return by investing your extra money, you would be missing out on a potential 4.1% excess return.”

The case for paying off debt before saving

One reason to prioritize paying off debt before boosting your emergency savings is for the mental relief, Suze Orman, personal finance expert and best-selling author of “Women & Money,” previously told CNBC Make It.

“Debt is bondage,” she says. “You will never, ever, ever have financial freedom if you have debt.”

Being in debt often causes negative psychological effects, adds Patterson, which can be reversed by making extra payments to pay down the balance. Plus, once the debt is paid off, you can redirect your monthly payments to other goals, like saving or investing.

“Seeing debt numbers rapidly decrease allows a person to feel freer from their debt, and ultimately feel a sense of accomplishment once they achieve the goal they’re working toward,” Patterson says.

It’s similar to the debate between the snowball versus avalanche methods of debt repayment. While it’s technically financially more prudent to use the avalanche method and pay off the debt with the highest interest rate first — because this will save you the most money on interest payments in the long term — research shows that people have more success with the snowball method of paying off the debt with the lowest balance first. Paying off one debt completely and quickly, and then moving to the next, builds momentum.

Individuals need to do what makes them feel the most secure and confident in their own financial lives.

“At the end of the day, any money you’re putting toward debt or investing is a step in the right direction,” writes Ellevest’s Sanborn.

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SOEs with outdated business models should be closed: Mboweni

Finance Minister Tito Mboweni says he is on a mission to trim down government spending.

Finance Minister Tito Mboweni has told Parliament in his Medium-Term Budget Policy Statement that some State-owned Enterprises (SOEs), with outdated business models are a fiscal risk and should be closed.

Mboweni is on a mission to trim down government’s spending. He says the SOEs must fix their governance failures, unsustainable debt burdens and operational performance over the next 10 years Eskom, and the energy sector will be supported with R230 billion for structural reforms.

Mboweni says government must wean the state-owned enterprises off the national budget. He says they can’t continue to throw money at Eskom.

“Going forward, the new cash flow support will no longer be equity, but will be in the form of loans – and a loan needs to be repaid with interests. Management have made an irrevocable commitment to implement government’s decisions and there is enough progress. We will negotiate the appropriate size of debt relief. Eskom is a business and it should be run like a business,” says Mboweni.

Mboweni has also told Parliament that government is targeting spending reductions of R21 billion in the 2020/2021 financial year and R29 billion in 2021/2022 financial year.

Minister Mboweni says the Ramaphosa administration is focused on keeping costs under control while working towards growing the economy.

He says the spending reductions will take place mostly in the areas of goods, services and transfers. Mboweni says the public sector spends over R5 billion on cell phone allowances annually. He says this will be stopped.

“If we are serious about running our country as a first-world country, we have to close the fiscal leakages. I mean a corruption, where huge amounts of public resources are wasted, and I’m taking away the cellphones – because people are paid salaries, and they can afford to buy their own cellphones,” says Mboweni.

SARS revives unit focusing on companies and wealthy South Africans – here’s what you need to know

South African Revenue Service (SARS) commissioner Edward Kieswetter has relaunched the group’s large business centre.

Speaking at the launch of the centre in Johannesburg on Wednesday (23 October), Kieswetter said that the unit hill help bring about voluntary compliance amongst corporate South Africa.

Currently, corporate income tax is the third-largest revenue contributor, having brought in 16.6% of the total revenue in the 2018/2019 financial year.

Kieswetter said that the taxpayer segment that the centre focuses on will include:

Large businesses defined as groups or entities with a turnover greater than R1 billion;
Companies listed on the Johannesburg Stock Exchange;
Financial services with a turnover greater than R500 million;
Mining companies with turnover greater than R500 million,
All entities or groups of companies with a combined total assets value greater than R100 million, as well as multinational companies.
Ultra High Net-Worth Individuals whose total assets are in excess of R75 Million.

Taxpayers who meet one of these criteria are registered with the SARS Large Business Centre, he said.

Services offered

Kieswetter said that the value proposition offered by the large business centre is to promote voluntary compliance at the lowest cost to the taxpayer and SARS.

He said this will include:

Dedicated relationship management by industry and sector, ensuring that tax teams allocated to the client has specialised knowledge and understanding of the client’s business;

A highly skilled and professional team with proficiency on multiple tax types for taxpayers with complex tax portfolios, including those operating in multiple tax jurisdictions. To this end, SARS aims to facilitate clarity of the taxpayer’s obligations and improve efficiency in assessments, audits and dispute resolution processes;

Centralised management of the taxpayer’s tax compliance requirements across tax types which SARS’ refers to as a ‘One-stop shop’ end-to-end service. This service provides the taxpayer with seamless interaction with SARS for any tax requirement or query the taxpayer may have, through one relationship management team who manages their entire tax portfolio.

Sars is set to be R215 billion short by the end of this tax year – here are six ways that will make you poorer

A widening tax shortfall is going to blow another hole in state finances – and ultimately leave ordinary people poorer.

Every tax year since April 2014, Sars has fallen short of the tax collection target set by National Treasury in the prior year’s Budget Speech.

Experts are now forecasting a record shortfall for the tax year ending March 2020 of as much as R60 billion, bringing the accumulated tax miss over the past 6 years to over R215 billion.

Figures from the National Treasury released at the end of September show that Sars collected 3.1% more tax during the first 5 months of the tax year compared to the same period in 2018.

However, to meet finance minister Tito Mboweni’s February Budget Speech target for the full tax year of R1.422 trillion requires 10.4% more in tax, which means Sars is 7.3 percentage points off the pace.

Here are six ways Sars’ failure to collect enough tax is likely to make you poorer:

You can expect more tax, soon.

The government deficit has to be plugged sooner or later.

The taxes that will be most likely be increased to do that will be personal income tax and valued added tax (VAT), Adrian Saville, Cannon Asset Managers CEO and a professor of economics at the Gordon Institute of Business Science, told Business Insider South Africa – not the corporate taxes that affect consumers less directly.

Government debt will cost you, eventually.

To plug the shortfall in tax revenue in the meanwhile, Mboweni is adding to government debt.

That expanding government debt has seen steadily increasing state bond yields to compensate investors for the worsening creditworthiness, says Glynos George, ETM Analytics managing director and chief economist.

The cost of servicing debt has been the top growing state expense for many years.

Eventually something has to give, and that something will be consumers one way or the other, most likely through more tax hikes.

Interest rates will rise if SA’s credit rating drops any farther.

The worsening creditworthiness of the government, with tax shortfalls at its heart, risks further rating downgrades. That would immediately push up the cost of debt – and would quickly require an increase in interest rates, rising the price of everything from credit card debt to home loans.

Fuel, food, and imported consumer goods will become more expensive.

The worsening state of government finances will make the rand vulnerable, and a weaker rand can have a dramatic impact on the cost of fuel and food, among other items dependent on imports or global prices.

A weaker rand will increase the price of maize, which will have an impact on the price of numerous foodstuffs from mielie meal to meat. South Africa is a major importer of wheat, so a weaker rand will also increase bread prices.

Other products that would be hit include chocolate, cell phones – and foreign holidays too, for those who can still afford them.

Electricity prices will go even higher.

Eskom has been burning billions of rands in imported diesel to try and avoid load shedding.

At the end of July, Eskom reported that the group and independent power producers had spent R6.5 billion on diesel-generated power in the year ended March.

That doesn’t get cheaper when the rand weakens, and ultimately Eskom recovers that money from consumers.

There will be even fewer jobs.

Whatever mechanism is used to plug the revenue shortfall will hit consumer confidence and business confidence, both of which are at the heart of economic growth. Nobody wants to invest when things are getting worse.

The impact of even lower growth will not be a decrease in the already sky-high unemployment – not as companies cut costs and consumers hit by higher taxes and other costs hang on to their money more tightly.

Consider switching to turnover tax system

In a move to encourage the development of small businesses, the government allows certain enterprises to register for a type of tax called turnover tax. If you meet the following main requirements (there are some others that would not affect most people but must be considered), you may be able to register your business for turnover tax and have access to reduced tax rates:

• Your business operates as one of the following vehicles:

a. Sole proprietor, that is if you run the business in your own name;

b. Company;

c. Partnership (if all partners are individuals);

d. Close corporation; or

e. Co-operative;

• The qualifying turnover of your business is less than R1m for the tax year;

• If the business is a company, close corporation or co-operative, all shareholders/members must be individuals;

• The year of assessment for your business ends on the last day of February;

• Neither you nor any other shareholder, member or your business itself can hold shares or interests in a company that is not listed in SA;

• If your business runs as a sole proprietor/ partnership, income from professional services cannot constitute more than 20% of its income;

• If your business operates as a company, close corporation or co-operative, not more than 20% of income may come from professional services and investment income.

If your business meets these requirements, you may be able to register it with the South African Revenue Service (Sars) for turnover tax.

You can do this by completing and submitting a TT01 form which is available on the Sars website.

This is a distinct application that you must complete and once you are registered you will be required to submit turnover tax returns to Sars.

The purpose of this tax option is to simplify the tax process for anyone who runs a small business.

The turnover tax system enables a qualifying micro-business to pay tax on its turnover instead of in the usual way, which, generally speaking, is to pay tax on the income of the business after business expenses have been deducted.

This means that with turnover tax you as the business owner do not need to keep detailed records of applicable business expenses because these are not taken into account in determining the tax payable.

Note that the business must however keep detailed records of income, dividends declared, assets and liabilities.

Low tax rates an incentive

While this system might appear to be detrimental to the business owner, bear in mind that turnover tax rates are low.

For example, if the turnover of a business is less than R335,000 no tax will be payable.

If the turnover of the business is between R335,000 and R500,000, the business will pay tax at the rate of 1% of the amount over R335,000; so if the turnover of the business is R500,000 the tax payable will be R1,650.

The maximum marginal rate of turnover tax is 3% on turnover between R750,001 and R1m.

On the other hand, if you run your small business as a small business corporation, as discussed in an earlier article, your marginal tax rate ranges from 0% to 28% on taxable income.

Lack of business expenses

As the taxable income method takes into account the expenses that a business incurs, it is difficult to establish whether turnover tax or operating as a small business corporation is the better option; each business would have unique expenses that it is able to deduct (if it operates as a small business corporation) to reduce its tax bill.

In other words, to establish whether your business would pay less tax by registering for turnover tax, you would need to do an analysis of it.

Generally speaking, if you run a business that
has minimal business expenses, the turnover tax system would probably be the better choice because your lack of business expenses would not result in a higher tax burden.

But if you operated as a small business corporation with minimal expenses, you could end up paying more tax than if you were on turnover tax.

The turnover tax system is completely optional, so there is no legal obligation to register for it if you meet the requirements.

It is best to do an analysis of your situation to determine whether it would benefit you to register for turnover tax.

Please note that if you are a personal service provider or a labour broker (without a Sars exemption certificate), you cannot register for turnover tax.

Employer Interim Reconciliation

What is Reconciliation?

It involves an employer submitting an accurate Employer Reconciliation Declaration (EMP501), Employee Tax Certificates [IRP5/IT3(a)s] to be issued and if applicable, a Tax Certificate Cancellation Declaration (EMP601).

The three elements that must reconcile in order for your submission to be successful are the:

Monthly Employer Declarations (EMP201s) submitted [Pay-As-You-Earn (PAYE) and/or Skills Development Levy (SDL), Unemployment Insurance Fund (UIF) amounts due and Employment Tax Incentive (ETI), if applicable]

Payments made (excluding penalty and interest payments)

IRP5/IT3(a)s generated – PAYE, SDL and UIF values.

Who is it for?

Employers need to submit their reconciliation by the date published in the Government Gazette.

When and how should submissions be made?

Reconciliation declarations should be submitted twice during year of assessment, for the:

Interim period – which is for the six month period 1 March to 31 August

Annual period – which if for the full year 1 March to 28/29 February.

The Business Requirement Specification (BRS) defines the data submission requirements for the tax certificates [IRP5/IT3(a)s], and the reconciliation for PAYE, SDL, UIF and/or ETI, if applicable.

Business Requirement Specification

Year Applicable Submission dates*

BRS – PAYE Employer Reconciliation for 2019 / 2020 2020 Annual Employer Reconciliation

(1 March 2019 – 28 February 2020) Interim: 23 Sep – 31 Oct 2019

Annual: 1 Apr – 31 May 2020

BRS – PAYE Employer Reconciliation for 2018 / 2019 2019 Annual Employer Reconciliation

(1 March 2018 – 28 February 2019) Interim: 17 Sep – 31 Oct 2018

Annual: 1 Apr – 31 May 2019

BRS – PAYE Employer Reconciliation for 2017 / 2018 2018 Annual Employer Reconciliation

(1 March 2017 – 28 February 2018) Interim: 15 Sep – 31 Oct 2017

Annual: 1 Apr – 31 May 2018

BRS – PAYE Employer Reconciliation for 2016 /2017 2017 Annual Employer Reconciliation

(1 March 2016 – 28 February 2017)

Interim: 12 Sep – 31 Oct 2016

Annual: 1 Apr – 31 May 2017

* The final submission periods are subject to business requirements / readiness and calendar working day dates. Final confirmation will be communicated at the time of the relevant submission period.

Completing your reconciliation online is the quickest, easiest and most convenient option. You can use either:

e@syFile™ Employer or

If you have 50 IRP5/IT3(a)s or less, use eFiling.

Copies of all declarations submitted and related supporting documents (relevant material) must be kept for five years.

Top Tip: Should your submission not balance across the three elements [EMP201, payments submitted and

IRP5/IT3(a)s)], we will alert you by letter.

Don’t forget the following important details:

1. Make sure you have the latest version of e@syFile™ Employer available. To download the latest version, click here.

2. Import the electronic Employee Tax Certificates [IRP5/IT3(a)s] CSV files from your current payroll system.

3. Reconcile your EMP501 –

Capture all additional manual IRP5/IT3(a)s, and e@syFile™ Employer will use the information, from all the tax certificates, to automatically calculate the certificate totals for your EMP501.

Enter your monthly liabilities, payments and Employment Tax Incentive (ETI) information, if applicable, and e@syFile™ Employer will calculate the rest!

4. Manually completed Payroll Tax, posted, are no longer accepted.

These forms include:

Monthly Employer Declaration (EMP201)

Employer Reconciliation Declaration (EMP501)

IRP5/IT3(a)s

Tax Certificate Cancellation Declaration (EMP601)

Reconciliation Declaration Adjustment (EMP701).

Top Tip: An exception is made for employers with a maximum of five IRP5/IT3(a)s. The employer can still go into a SARS branch where an agent will help them capture these IRP5/IT3(a)s and the EMP501.

These electronic channels are free, convenient and available 24/7.

5. Make sure your reconciliation submission balances.

The EMP501 must reconcile to your EMP201s, which should have been submitted during the period (giving you a chance to correct this, where needed).

The EMP201s must reconcile to payments made for the period.

The EMP201 payments must reconcile to your IRP5/IT3(a)s generated.

Top Tip: Experiencing problems due to duplicate or incomplete EMP501 submissions made on e@syFile™ Employer, read more here.

6. Send your reconciliation before the deadline to avoid penalties and interest being charged.

Please note: Submissions made on a disc at a SARS branch is no longer available.

When an audit is done internally by SARS on the EMP501, and PAYE liability is amended thereby, the employer is required to re-submit the EMP501 in accordance with the audit result on the assessment (EMP217).

Did you receive an SMS from SARS showing your tax calculation?

Here’s why you received it: SARS has access to many sources of information about taxpayers, including information already on the SARS system. Based on this information, SARS can make a tax calculation and arrive at an outcome before you even lift a finger. This outcome will show whether you would get a refund or owe SARS money if you were to file a return. So the reason why you got a tax calculation this year is because you filed a return last year when you were not required to do so. We introduced this tax calculation as a way of assisting our taxpayers to avoid unnecessary visits to our branches during Tax Season.

What do you need to do?

If your financial circumstances have not changed since February 2018 then you do not need to file a return.

Will SARS impose penalties if I do not submit a return?

No. SARS will not impose any administrative penalties and you will not have any outstanding returns under your profile because the taxpayer is not required to file by law.

Will I be refunded if I am eligible to receive any refund?

In terms of legislation, SARS is only eligible to refund an amount greater than R100.

Can I file a return if my circumstances have changed since February 2018?

Yes you can. However, be smart and use the eFiling channel or the SARS MobiApp to avoid the queues at our branches. Click here for more info on eFiling and the SARS MobiApp.

Why is SARS not refunding amounts below R100?

Normally there are costs involved to pay out refunds as is the case when SARS needs to collect tax that is due. It is therefore not cost effective to refund or collect an amount as low as R100. This however does not mean that the tax debt disappears, it will still remain due by or to the taxpayer and will be carried forward to either set-off future tax debt for the same tax type or will be added to any refund which is higher than R100 when applicable. The amount of R100 refund is specified in section 191(3) of the Tax Administration Act, 2011 and reads as follows: “An amount is not refundable if the amount is less than R100 or any other amount that the Commissioner may determine by public notice, but the amount must be carried forward in the taxpayer account.”