Nine things to know about tax free savings
22 August 2014
Posted by: Author: Ingé Lamprecht
Author: Ingé Lamprecht
article originally appeared on Moneyweb
What is a tax-free savings account?
This is a generic type of
savings account that investors will be able to open from March 1 next year.
Individuals will be allowed to hold a variety of underlying investments in
these accounts. All proceeds on the investments through these accounts will be
tax-free in the hands of the individual. This includes dividends, capital gains
Government hopes that this
incentive will encourage consumers to save (in addition to their retirement
savings). Many South Africans only save through a pension fund and often have
to access these funds in the event of an emergency. National Treasury believes
the tax-free savings account will reduce South Africans’ financial
Investors would be allowed to
open multiple tax-free savings accounts annually with different underlying
investments. However, investors would only be permitted to contribute up to a
maximum of R30 000 per annum to these accounts (in total). The lifetime
contribution limit will be capped at R500 000.
Who will be allowed to offer these accounts?
Several financial services
providers will be permitted to offer these accounts. According to the draft
explanatory memorandum on the Taxation Laws Amendment Bill, these institutions
include "JSE authorised users, banks, long term insurers, collective investment
scheme companies [unit trust companies], linked investment services providers
and national government”.
What underlying investments will qualify?
Most unit trusts, bank savings
accounts, fixed deposits, retail savings bonds and certain exchange-traded
funds (ETFs) will be eligible for inclusion. Direct share purchases will not be
Investors would however be able
to get equity exposure by investing in an equity-only unit trust in a tax-free
savings account for example.
Financial services providers
that already offer qualifying underlying products would not have to create a
new product. They would be able to offer their existing products in a new
"wrapper” – the tax-free savings account.
Regulations regarding the exact
products that will be eligible for inclusion will likely be published later
What happens to the current interest rate exemption?
While the initial proposal was
for the interest rate exemption to be abolished, it has since been decided to
keep this exemption in place. However, the current exemption of R23 800 for
individuals below 65 and R34 500 for individuals above 65 will not be adjusted
for inflation anymore and will therefore erode over time. This exemption will
still be applicable to interest earned on deposits outside the tax-free savings
Any interest earned on deposits
and investments within a tax-free savings account will be completely tax-free.
Will my existing unit trust investments automatically qualify as tax-free
No. If you would like your
current investments to qualify (and if they do indeed qualify), you would have
to open a tax-free savings account with your financial services provider and
transfer funds into the account (even if it has the same underlying
As an example: If you currently
have R30 000 invested in a Balanced Fund unit trust at Asset Manager X and
would like this investment to be tax-free, you would have to open a tax-free
savings account with Asset Manager X and transfer this R30 000 into the
underlying investment (the Balanced Fund) in the tax-free savings account.
Does the scheme effectively mean that on March 1, 2015 it would be within the
proposal for me to place R500 000 into 16 call accounts at R30 000 each and 1
at R20 000?
No. On March 1 next year you
would be able to invest R30 000 in one or more of these accounts. The
investment will be capped at R30 000 per annum and it will therefore take you
around 16 years to reach the lifetime contribution limit of R500 000. In other
words you will only be allowed to invest R30 000 again on 1 March 2016.
Is my understanding correct that the maximum balance allowable, covering all
the relevant accounts, may not exceed R500 000?
No. Your capital contributions
over a lifetime may not exceed R500 000. All interest, dividends and capital
gains in excess of R500 000 may stay in these accounts to accrue even more
interest and dividends.
What happens if I contribute more than the R30 000 annual limit?
According to the memorandum,
the South African Revenue Service (Sars) will levy a penalty of 40% on the
amount in excess of R30 000 in any year. This will also apply to contributions
in excess of the lifetime contribution cap.
May I withdraw my money from these accounts at any time?
Yes. Investors will be allowed
to withdraw money from these accounts as and when they see fit. However, in
order to prevent withdrawals for impulse or unnecessary purchases amounts
returned to the tax-free savings account will be subject to the annual
For example: If an individual
invests R30 000 in one of these accounts on March 1 2015 and decides to
withdraw R15 000 after six months, she has already reached the annual
contribution limit for the year (March 1, 2015 to February 29,
2016) and would only be able to "replace” the R15 000 in the next year (from
March 1 2016 to February 28, 2017). If she decides to do so, she will have R15
000 of her annual cap "left” to contribute during that year (March 1, 2016 to
February 28, 2017).