Tax free investment savings accounts

A3_bOur clients will have noted the various advertisements on radio and in the media generally of financial service providers inviting the public to invest in their respective so-called ‘tax-free savings’ investment products.  These accounts are made possible by section 12T of the Income Tax Act, 58 of 1962, introduced in 2015 as an initiative by National Treasury to encourage a savings culture in the South African public through making use of these predetermined and specific income tax concessions linked to these accounts.

In essence, all amounts received from tax-free savings are exempt from income tax and specifically:

  • Dividends paid to such accounts will not attract dividends tax;
  • Realisation of assets in tax-free savings accounts will not give rise to capital gains or losses (and are thus effectively exempt from the capital gains tax regime); and
  • Any amounts received will be exempt from income tax.

The tax-free savings regime however only applies to natural persons and deceased estates of persons who had during their lives contributed amounts towards these ‘tax free savings’ accounts.  The regime is therefore not available to companies or trusts.  Contributions to such accounts are limited though to R30,000 annually as well as a total of R500,000 during a person’s lifetime.  Where these amounts are exceeded, the excess amount shall be deemed to be taxable income of the contributing individual, and which is prescribed to be taxed at 40%.  (Interestingly, this amount appears to have been overlooked by the Legislature when it recently increased the maximum marginal income tax rates of individuals from 40% to 41%…)  This is quite an onerous provision, and care should thus be taken that these amounts are not breached by individuals contributing to these tax-free savings.  Transfers between tax free savings accounts by an individual are however not included in the R30,000 or R500,000 limitations, as well as any income received from tax free savings capital.  The limitations therefore only apply to new capital being introduced into an individual’s tax free savings viewed cumulatively.

It is questionable whether the initiative goes far enough and is as lucrative as may seem at first blush.  Natural person taxpayers will be reminded that they are already afforded an annual R30,000 effective rebate from capital gains tax (the first R30,000 of capital gains/losses realised in a tax year is ignored for capital gains tax purposes), and further that an annual interest exemption of R23,800 (R34,500 in the case of individuals older than 65) applies notwithstanding the section 12T concessions.

When taking into account that financial products perceived as conservative are typically those approved by the Financial Services Board as ‘tax-free investment savings accounts’, it does not naturally follow that after-tax profits from tax-free savings will necessarily exceed savings in the conventional form.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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