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Tax free savings accounts: Can we build a savings culture?
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27 May 2014

The South African economy today is still fragile due to the distorted pattern of ownership and economic exclusion created by apartheid policies which did not create a pro-savings culture in SA.

Research done by the World Bank found that few South Africans retire with enough savings to support themselves. Furthermore, the South African Savings Institute reported that South African households saved only 1.7% of the GDP in 2012, compared to the Chinese who save 22% of their GDP. In China, household savings account for 51% of their total savings whereas in South Africa, household savings account for just 15% of the total savings.  This is significantly lower than the target set by the National Development Plan (NDP) to increase savings to 25% of GDP by 2030.

According to Stiaan Klue, Chief executive of SA Institute of Tax Professionals (SAIT), the question remains whether initiatives such as the tax free savings account incentive, which the National Treasury aims to implement in 2015, will foster a savings culture that could effectively counter against the low growth, middle income trap that South Africa finds itself in.

According to the NDP there are four key features of this trap that serve to reinforce each other. These are low levels of competition for goods and services, large numbers of work seekers who cannot enter the labour market, low savings and a poor skills profile. “Exacerbating the problem is the fact that most of our domestic consumption is financed with debt and many households are falling behind on their debt payments, adds Klue. “This is not a sustainable position for our people.”

“It has become increasingly obvious that something needs to be done to change the way South Africans manage their money, and National Treasury’s tax free savings account incentive can definitely be regarded as a step in the right direction,” adds Klue.

Sharon Smulders, SAIT’s Head of Tax Policy and Research explains that the purpose of these tax free savings accounts is to put a deadline on savings decisions and to dissuade impulse spending.

Banks, asset managers and brokers will all be allowed to offer the tax free savings accounts. Smulders notes that investors need not be too concerned about changing their existing investments as a large number of these investments (such as collective investment schemes, fixed deposits, REITs and retail savings bonds) would be eligible for inclusion as tax free savings accounts. Certain linked and non-linked insurance investment policies that meet certain requirements would also be eligible she says.

Emmerentia Fischer, SAIT Operational Executive explains that the proposed tax free savings accounts will work as follows:

  • Individuals will be allowed to open one or two accounts per year where they may invest in either interest bearing or equity instruments (or both);
  • The total annual contribution may not exceed R30 000 per tax year;
  • A lifetime contribution limit of R500 000 is applicable to these investments;
  • Unnecessary withdrawals will be discouraged by not permitting replacement of withdrawn amounts;
  • Any interest, dividends and capital gains from these investments will be tax free in the individual’s hands.

From a compliance perspective, Fisher urges taxpayers to ensure that they provide the necessary information of these tax free savings products on their annual income tax returns submitted to SARS – new source codes will be provided for the income earned and contributions made to these tax free accounts.

SARS will be responsible to consolidate all the annual information to check that the annual limits are not exceeded and to provide anonymised information on the usage of the account to National Treasury in order to monitor and evaluate the progress of the incentive against the stated objectives.

Smulders reminds taxpayers not to forget to still claim the annual interest tax exemptions for individuals (R23 800 for individuals below 65 years of age, and R34 500 for those 65 years or older). This exemption will still be available for individual taxpayers but the Rand value will not be increased with inflation and will thus erode over time.

The SAIT has submitted comments to the National Treasury on additional ways in which the tax free savings accounts could be improved from both a technical as well as a compliance cost perspective. Overall though, the SAIT commends the National Treasury on the introduction of these tax free savings accounts as it believes that it will help improve and encourage a much needed savings culture in South Africa.

 

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