The Tax-Free Savings Account

This means that local interest earned will be tax free, local dividends will not be subject to dividends withholding tax and gains made on disposal of tax-free investments won’t attract capital gains tax. The account does, however, form part of your dutiable estate on your demise and is therefore subject to estate duty and executor’s fees.

The account offers investors a good way to maximise investment growth, but the applicable restrictions must be taken into account:

Restrictions:
Contributions to these accounts are restricted to R 33,000 per annum and a lifetime limit of R 500,000; any contribution in excess of these limits will be subject to a 40% taxation. This limit applies across all tax free investment accounts held by individual investors. However, reinvestments of income (interest and dividends) do not count towards the annual or lifetime contribution limits. Investors who invest the annual maximum on a monthly basis (R 2,750 per month) will reach the lifetime limit after 182 months. While no new capital contributions will be allowed beyond this point, the capital and proceeds could remain invested to reap the benefits of compounding.

Existing investments cannot be converted to tax free investment accounts.

Withdrawals and accessibility:
Investors have unrestricted access to the capital, which differs from the traditional retirement savings vehicles.

However, these accounts are designed to encourage long term savings; replacements of contributions withdrawn do not reduce the contribution total, in other words, once you have withdrawn funds, you are not allowed to replace them, so you lose out on future tax-free growth from those funds. This provision is meant to discourage you from treating the account like a short-term savings account.

Applicable investors:
The accounts are available to South African resident individuals only. They cannot be used by trusts, companies or other legal entities.

Parents can open accounts in the name of their minor children, however any withdrawal must be paid to a bank account opened in that child’s name.

Types of investment available:
Accounts may be in the form of Unit trusts, bank accounts, stock broker accounts, retail savings bonds and life assurance policies. The accounts must be clearly designated as tax free.

Tax payers will receive the maximum tax benefit from investments that typically have higher income yields and/or greater chance of capital growth.

Compared to discretionary investments:
In discretionary investments, interest is taxed at the individual’s marginal rate and dividend withholding tax of 20% applies. At the end of the investment period (switch or repurchase), capital gains tax is levied up to a maximum of 18% on the gains.

In comparison, all proceeds on the tax-free savings account are 100% tax-free.

How to proceed:
The expected return, tax saving per product relevant to your personal marginal tax rate and suitability relative to your overall portfolio should be carefully considered in your investment decision-making process to ensure efficient use of the benefit of a Tax Free Savings Account.
It is always advisable to consult a professional financial planner or CFP® when making investment and financial decisions.

Article contributed by Independent Wealth Managers.
Independent Wealth Managers is a FPI Approved Professional PracticeTM and authorised financial service provider; FSP No. 3145.
www.iwm.co.za

The information in this communication is based on current legislation (2016) and is not to be construed as advice in terms of the Financial Advisory and Intermediary Services Act of 2002 (‘FAIS’).