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What’s next for tax-free savings accounts?

Calls to increase the annual and lifetime limits, but is there money for this?

Almost four years have passed since National Treasury introduced tax-free savings accounts (TFSAs) to improve South Africa’s dismal savings rate.

The accounts provide a tax-free wrapper that investors can use for investments in various asset classes by opening accounts with banks, asset managers, life insurers and stockbrokers. Currently, individuals can invest up to R33 000 per annum in one or more TFSAs (collectively) up to a maximum of R500 000 over their lifetime. The investment returns are completely tax-free.

When TFSAs were introduced on March 1, 2015, Treasury stopped adjusting the annual interest exemption (R23 800 for people younger than 65; R34 500 for those 65 and older) in line with inflation every year. In this way, the incentive would be revenue neutral. The tax revenue the fiscus would ‘lose’ by offering TFSAs would be ‘gained’ by not increasing the interest exemption.

The intention was that the annual limits should be increased on a regular basis for the impact of inflation, but that the lifetime limit would remain static – at least in the short term. On March 1, 2017, Treasury increased the annual limit from R30 000 to R33 000. The question is whether it will do so again this year, or whether fiscal constraints make it unlikely? Unfortunately, significant pressure on state finances means that government increasingly prioritises funds for immediate concerns (such as Eskom) and that money for savings incentives may need to wait in line.

Denver Keswell, senior legal advisor at Nedgroup Investments, says as much as they would like to see an increase in the contribution limits, there has not been any indication that it will happen this year.

Another (pleasant) surprise?

“However, when the annual limit was raised to R33 000 from R30 000 two years ago it did take us by surprise, so let’s hope that happens again.”

Keswell says the hope is that South Africa will follow a similar trajectory to the trend of the UK equivalent, the individual savings account (ISA). About five years ago, the annual cap for ISAs was just below £12 000, but it was increased to £20 000 two years ago.

“While much of the focus to date has been on the annual contribution limits, what we would really like to see is an increase in the lifetime limit.”

By not increasing the lifetime limit, there is an unintended consequence of a barrier to entry for any investor who intends to withdraw and replace their funds in the short to medium term, because once an investor withdraws funds from the account, they are unable to replace them. This means that if they do then ‘replace’ the funds they withdrew, they will be reducing their remaining allowance within the R500 000 lifetime limit, he adds.

“Obviously, this can have a real impact on an investor’s financial outcome in the tax-free investment.”

Annual allowance

Pieter Hugo, MD of Prudential Unit Trusts, says the only change they would like to see is an increase in the annual allowance, which has only been increased once since the introduction and hasn’t kept up with inflation.

“We’re in an economy with an extremely low savings rate, and if the intention of government is to encourage (regular) savings, then you would expect government to increase this every year by a minimum of the official inflation rate to maintain the incentive.”

While it isn’t critical at this stage, they would also expect the lifetime limit to increase in line with inflation.

“What we wouldn’t want to see is a situation similar to the old R1 750 per annum retirement annuity contribution limit, which wasn’t increased for decades.”

Since March 1, 2018, investors in TFSAs may transfer accounts directly between product providers for the first time without affecting their annual or lifetime contribution limits.

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It would nice to see some physical commodity ETF’s included in the basket. Example: NewGold and NewPlat.

We have a heritage of mining in South Africa and I believe this would be a great inclusion.

What’s next for tax free savings accounts?

Tax

Taxable Tax-Free Savings….in confused S’African style *lol*

Off the topic, but it would be great if SARS could increase the CGT primary residence exclusion of R2m on your home. By not increasing the threshold, we are effectively being forced to pay tax when we sell our primary residence, which is ridiculous.

It is important to ease the tax burden of the approximately 2 million taxpayers contributing 80% of SA tax, using taxation to relieve poverty and create more wealth is just as, if not more, important.

With all its failings, the apartheid regime set about “affirmative action” with some efficiency. Sadly, this was for its own electorate, a minority of the population but it does not detract from its successes. One of these was home-savings schemes. These were tax free, had to be with building societies and, if used for home-buying, attracted an extra 1% interest. This channelled money into funding housing and enabled young couples to buy homes. There is no restriction on how the current tax free savings may be used by the banks, i.e. to fund affluent client’s luxury consumption or even sending cash offshore.

From a moral point of view, the saver should demand the bank not to charge an interest higher than, say 18% per year, to short-term-loan-customers, including costs etc.

Then I know my money is not used to abuse people.

Two things I want for the TFSA:

1. Increase limit to R36300
2. Stop asking me to fill in my TFSA numbers in my tax return.

TFSAs are a joke from whatever angle one looks at them – the limits, the reporting to SARS etc., etc.

TFSA…..To the ANC government is like the last serving of cake in the Fin economy to abuse. A possible CGT on >500000.00

Living the informal life all talk made sense off success for them, not formal.

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