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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