Author: Douglas Gaul (Grant Thornton Johannesburg)
Following much anticipation, taxfree savings accounts (TFSA) were introduced on 1 March 2015 as a way to encourage South Africans to save. Natural persons, as well as the deceased or insolvent estates of a natural person, can invest in certain approved tax-free investment vehicles.
What you need to know about tax-free savings
There is an annual contribution limit of R 30 000, and a lifetime limit of R 500 000 to tax-free investments.This means that by investing R 30 000 per annum, an individual can build up a tax-free investment of R 500 000 over a period of approximately 17 years.
The final Regulations provide that existing investor products may not be converted into TFSAs, implying that all TFSAs must be originated with new contributions from the investor. The aim of this requirement is to encourage new savings
Two kinds of platform providers currently offer tax-free savings accounts – LISPs (linked investment service providers) and stockbrokers. While no direct share trading is allowed within TFSA, certain ETFs are eligible for inclusion. These TFSA administrators may not levy performance fees but there is no restriction on the asset manager’s flat fee and your capital is not guaranteed.
All savings and investment products that have a term of maturity must be accessible within 32 business days from the time that the money is requested, meaning you will have access to your investment at any time. However, be aware that if you withdraw any funds, you will not be able to return the money later and you will lose the value of that withdrawal from your lifetime limit. In other words, these investments should ideally only be used for longterm investments i.e. 20 years and longer.
All amounts received or accrued from the investment will be exempt from normal tax - income tax, dividend withholdings tax or even capital gains tax when disposing of the investment.
None of the income generated by the investment, for example capitalised interest, will be taken into account when calculating the annual contribution limit of R 30 000, or lifetime contribution limit of R 500 000, and investors can transfer amounts between tax-free investments without affecting these limits , but such transfers may only be made after 1 March 2016. A transfer of TSFA between investors, however, will not be allowed.
Interest received from tax-free investments will also not be taken into account when determining a taxpayer’s existing interest exemption of R 23 800 (for taxpayers younger than 65 in terms of section 10(1)(i) of the Act). Thus, an individual younger than 65 who invests R 30 000 in a tax-free savings vehicle at a rate of 6% could earn tax-free interest of R1 800 in the 2016 year of assessment. However, the taxpayer will also still be exempt from tax on interest earned on other investments up to an amount of R 23 800. Effectively, the taxpayer will enjoy a total interest exemption of R 25,600 in that year of assessment.
Finally a word of caution, in terms of the legislation, if you exceed the annual contribution limit of R 30 000 or the lifetime limit of R 500 000, 40% of the excess will taxed at your marginal rate. However, National Treasury recently announced in a media statement, that institutions are also not allowed to accept deposits in excess of these limits. They cautioned that, "Service providers are not allowed to accept amounts in excess of the contribution limits. It remains the responsibility of the investor to ensure that he or she adheres to the annual and lifetime limits or else face the penalties for breaching these limits.”
Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.