Things to know about tax-free savings

This article gives an overview and tries to answer a couple of questions related to tax-free savings accounts. Please bear in mind that the draft regulations still have to be signed into law (this is expected to happen late this year) and that there may still be a few tweaks to the proposals before it is officially introduced.

• What is a tax-free savings account? This is a generic type of savings account that investors will be able to open from March 1 next year. Individuals will be allowed to hold a variety of underlying investments in these accounts. All proceeds on the investments through these accounts will be tax-free in the hands of the individual. This includes dividends, capital gains or interest.

• Who will be allowed to offer these accounts? Several financial services providers will be permitted to offer these accounts. According to the draft explanatory memorandum on the Taxation Laws Amendment Bill, these institutions include “JSE authorised users, banks, long term insurers, collective investment scheme companies, linked investment services providers and national government”.

• What underlying investments will qualify? Most unit trusts, bank savings accounts, fixed deposits, retail savings bonds and certain exchange-traded funds (ETFs) will be eligible for inclusion. Direct share purchases will not be allowed.

• What happens to the current interest rate exemption? The current exemption of R23 800 for individuals below 65 and R34 500 for individuals above 65 will not be adjusted for inflation anymore and will therefore erode over time. This exemption will still be applicable to interest earned on deposits outside the tax-free savings account.

• Will my existing unit trust investments automatically qualify as tax-free investments? No. If you would like your current investments to qualify, you would have to open a tax-free savings account with your financial services provider and transfer funds into the account (even if it has the same underlying investment).

• Does the scheme effectively mean that on March 1, 2015 it would be within the proposal for me to place R500 000 into 16 call accounts at R30 000 each and 1 at R20 000? No. On March 1 next year you would be able to invest R30 000 in one or more of these accounts. The investment will be capped at R30 000 per annum.

• Is my understanding correct that the maximum balance allowable, covering all the relevant accounts, may not exceed R500 000? No. Your capital contributions over a lifetime may not exceed R500 000. All interest, dividends and capital gains in excess of R500 000 may stay in these accounts to accrue even more interest and dividends.

• What happens if I contribute more than the R30 000 annual limit? According to the memorandum, the South African Revenue Service (Sars) will levy a penalty of 40% on the amount in excess of R30 000 in any year.

• May I withdraw my money from these accounts at any time? Yes. Investors will be allowed to withdraw money from these accounts as and when they see fit. However, in order to prevent withdrawals for impulse or unnecessary purchases amounts returned to the tax-free savings account will be subject to the annual contribution limit.

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Electronic Procurement Network

Some 500 local suppliers in the Western Cape can now enlist on an integrated electronic procurement network, following the launch of the Western Cape Department of Economic Development and Tourism’s (DEDAT) access to markets programme. The department says the programme will offer small enterprises exposure to potential buyers.

Supply Chain Network, which uses an online system to connect buyers and sellers, has been appointed to manage the programme. Launched in 2012, the procurement portal is currently used by over 3 000 buyers who can instantly source services from any of the portal’s 20 000 small supplier members.

Efficient procurement strategies matching type of information systems and type of developers (Photo credit: David T Jones)

To join the online portal, suppliers must be qualified in their respective field of work, and their businesses must be registered and compliant with industry protocols.

These regulations include routine registration validation by the Companies and Intellectual Properties’ Commission (CIPC) and tax compliance checks by the South African Revenue Service (Sars). By joining the network, suppliers will be able to make online submissions on quotes and invoices in a matter of seconds.

Registered members can create and manage their own company profiles, while marketing their services to big corporates by publishing their compliance levels. Monthly membership fees for the portal amount to R195 per month or R2 340 per year. But those companies accepted into the programme will only have to contribute R65 a month (or R768 per year).

Contact DEDAT on 021 483 9026 for further information.

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Tax dispute resolution revised

Tax dispute resolution rules have been revised and are meant to expedite feedback to taxpayers who have lodged an objection or appeal against a tax assessment or decision by the South African Revenue Service (Sars).

The new rules provide that a taxpayer may choose to have a dispute resolved in the alternative dispute resolution proceeding. If not, the tax board can deal with certain appeals. The matter may also be taken to the Tax Court, High Court and Supreme Court of Appeal.

The rationale for the new tax dispute resolution rules is twofold. The old rules were included in a section in the Income Tax Act, which was moved to the new Tax Administration Act. While the new rules explain the administrative process in a more comprehensive manner, the idea was also to protect taxpayer rights.

Taxes (Photo credit: LendingMemo)

Changes to tax dispute resolution

Whereas certain taxpayers have already been allowed to submit an objection electronically, the new rules specifically provide for the electronic submission of a document, notice or request to Sars, the clerk or the registrar via e-mail. Where a taxpayer uses the eFiling system, objections may only be lodged by using the NOO1 form on the eFiling system. In these instances Sars will respond by issuing a notice to the taxpayer’s electronic platform. This means that taxpayers would regularly have to check the eFiling system for feedback.

The basic rule that an objection must be delivered within 30 business days from the date of assessment still applies. Taxpayers are advised to request reasons for the assessment. Sars must now respond to a request for reasons within 30 to 45 [business] days. The taxpayer must deliver a notice of objection within 30 [business] days after delivery of the reasons.

The revenue service will have to notify the taxpayer of the allowance or disallowance of the objection and the basis thereof within 60 business days after delivery of the taxpayer’s objection. If a taxpayer is still unhappy he or she may appeal against the decision to the tax board or tax court. In such a case the notice of appeal must be delivered within 30 business days after the delivery of the notice of disallowance of the objection.

But what if taxpayers don’t receive feedback within the specified timeframes?

Taxpayers are advised to follow up with Sars in writing if feedback was not received as tax dispute resolution is a formal process and if the correct procedures are not followed the dispute may not be resolved.

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Viability of a business idea

Most people do not take kindly to it when somebody, whether a financier or business advisor, has to tell them that their business concept is not viable. Brilliant business ideas do not necessarily make a good business. It boils down to whether the ideas can be implemented with ease and can generate a lot of money. Usually, start-ups are where most of the problems lie.

How would you confirm that a business will be viable?

There are no past records to analyze and assess except for the business plan and the entrepreneur.  Assessing viability of a business concept is not so simple since one looks at it in terms of market, technical, organisational and financial issues. These are mainly covered by a feasibility study done before the business plan is compiled:

• Market Viability: On assessing market viability one looks at the industry and market conditions at present, the growth potential and the level of competition

• Technical Viability: On technical viability the assessment is on how intricate the process of producing a product or service is, how easily available are the raw materials and machinery (where applicable) and where they are going to be sourced from, at what prices, the technology to be used whether is new or obsolete and its lifespan, the expertise available in terms of production and servicing machinery, if raw materials and machinery will be imported the impact of the weak Rand on the business, what extent of technical compliance is required for the business and etc.

• Financial Viability: The financial viability assessment brings all the above elements together and translate these into figures. This is where the final decision is made

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