By Lindi Jonker
Tax Free Investments (TFI) were introduced on the 1st March 2015 as a way to encourage South African households to save. It is a long-term investment opportunity that encourages you to save monthly without paying any capital gains tax on the growth of the investment or income tax on interest or dividends received.
For this very purpose, Section 12T of the Income Tax Act No 58 of 1962 creates a tax- free saving method and allows taxpayers to save using saving products offered by recognised service providers (financial institutions).
The difference between a TFI and a normal savings account is that all returns generated from a TFI are tax-free while the interest earned on a savings account is interest exempt up to R23 800 per year for individuals under 65 and R34 500.00 for individuals 65 years and older.
Consider that the current annual interest exemption for people below age 65 is R23 800 per annum and this is not going to be increased in future. If you are younger than 65 and select only interest-bearing funds earning, say, 6% per annum, the fund would have to be worth R396 667 before the interest exemption is exceeded.
It would take you just over 10 years to reach those levels of investment in a TFSA if you invested R30 000 per year into interest bearing assets earning 6% per year.
The current capital gains tax exclusion is R40 000 per year. If you chose investments with strong capital growth it could potentially exceed the capital gains exclusion within five years. Thereafter, you would be better off having this money in a TFSA than elsewhere.
Tax free investments are not appropriate for all individuals as one size does not fit all. Your age, income, current investment portfolio and retirement annuity fund contributions are all important factors to consider and therefore obtaining advice from your financial planner is critical before considering where and what to invest. If you have no relationship with a good financial planner, Business Accounting Network have alliance partners that we can refer to.
Tax Free Investment Limitations:
- Only natural persons (individuals) can make use of this type of investment.
- There is an annual limit of R33 000.00 per tax year (March to February)
- The annual limitation cannot be carried over to the next tax year.
- There is a lifetime limit of R500 000.00 in aggregate.
- These investment limits apply per person to overall contributions made to all tax free investment funds.
Tax Penalty for over-investing:
SARS will impose a hefty 40% tax penalty if an individual investments’ more than the allowed R33 000 per tax year.
An example: If you invest R38 000.00, you will pay a tax penalty of R2 000.00.
(R38 000 – R33 000 = R5000 x 40%)
All growth in this investment is fully exempt from any tax on interest, dividends or capital gains. This means that you are not liable for tax on the return of your investment or if you withdraw the funds from this account.
The capitalisation of the interest or returns on these investments within the tax free account does not affect the annual or lifetime limit.
For example: If in year one, you invest R33 000.00 and your return on this investment was R2 000 and you did not withdraw the growth from the fund but chose to capitalise it, your fund value would be R35 000.00 at the end of year one, and you will still be able to invest a full R33 000.00 for year two.
However, if you chose to withdraw the R2 000.00 and re-invest it, then it would be limited to the annual amount of R33 000.00 per year.
Parents can invest on behalf of their minor children; however, this investment will be recorded against the minor’s annual and lifetime limitations.
Your Tax Return:
On your income tax return, you will need to indicate that you have contributed to or withdrawn from a recognised Tax Free Investment.
The amount invested must be declared on your tax return and they will appear on the bottom of your Income Tax Assessment (ITA34).
The service providers (Financial Institution) will provide tax payers with a IT3(s) annual tax free investment certificate indicating the amounts contributed, withdrawn or transferred as well as the return on investment
This information will be provided to SARS twice a year by the service provider but it is the taxpayers responsibility to declare the investments and returns on his/her tax return.
Lindi Jonker, of Business Accounting Network is the franchise owner of the area practice at N1 City, Cape Town.
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