Tax-free savings accounts (TFSAs) get the go-ahead.
Any amounts invested in these accounts will not attract any form of tax, including interest income tax, capital gains tax and dividend tax. Rowan Burger, executive at Momentum says that the tax-free benefit will significantly improve investment returns for individuals. For example if a 25-year-old invested R30 000 each year into an interest-bearing bank account, by the age of 65 they would have just over R1.5 million after tax. In comparison, a tax-free savings account with the same interest rate would be worth R2.7 million, as no tax is payable.
Parents can also open TFSAs for their children – a family of four can effectively save up to R120 000 a year in a TFSA. This makes a TFSA an ideal vehicle for saving for your children’s education.
Product houses were waiting for final details on the accounts from National Treasury which were issued last week, so expect to see above-the-line marketing of new TFSA products. In the meantime, this is what you need to know:
Where you can invest
TFSAs can be issued by banks, long-term insurers, managers responsible for collective investment schemes (unit trusts and exchange-traded funds), the government (through the retail savings bond scheme), mutual banks and co-operative banks.
In order for a product to qualify as a TFSA it has to be simple to understand, adequately transparent and suitable for investors. According to National Treasury, the following products will be eligible as TFSAs: most savings accounts with banks, fixed deposits, unit trusts (collective investment schemes), retail savings bonds, certain endowment policies issued by long-term insurers, linked investment products, and exchange-traded funds (ETFs) that are classified as collective investment schemes.
Performance fees will not be allowable for TFSAs and savings products that can be used as transactional accounts are not allowed.
How much you can invest
Contributions to all tax-free savings accounts will be limited to R30 000 during any year (update: this was increased to R33 000 from 1 March 2017) and R500 000 over the life of an individual. National Treasury has confirmed, however, that over time the balance in these accounts may exceed the R500 000 limit due to accumulated earnings and capital gains.
Investors should note that any contributions in excess of the annual limit will be taxed at 40%. Although National Treasury has stated that product providers must disclose these contribution limits and the consequences for breaching them when marketing products, it remains the responsibility of the investor to ensure that they adhere to the annual limit.
You can only use new funds
In order to promote savings, National Treasury is not allowing the conversion of an existing saving account into a TFSA. However, where a low-income individual is invested in a product that is not suitable for their needs, such as an endowment policy with a tax rate of 30%, National Treasury is investigating the possibility of allowing individuals to convert their savings or investment in current products into tax-free investments as long as the value does not exceed the annual limit. This however will only be finalised later this year.
All savings and investment products that have a term of maturity, such as fixed deposit, must be accessible within 32 business days from the time that the money is requested, while in the case of other products it must be paid out within seven business days. National Treasury has allowed for an administrative penalty of a maximum of R300 for early withdrawal of fixed-term investments. You will however be able to transfer funds from an existing TFSA to another TFSA as from 1 March 2016.