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Do reinvested dividends count as part of the R36k limit of a TFSA?

They don't – provided that they are automatically reinvested by the product provider.

I understand that in a specific tax year, I can contribute R36 000 annually tax-free (maximum R500 000 over my lifetime) in a tax-free savings account and I understand that all capital growth, dividends and interest are tax-free. But what about reinvested dividends and interest received on the funds already invested?

On my platform (Satrix) there is an option to reinvest all returns automatically, does that reinvestment count as part of the R36 000 limit per year or not?

It’s not clear to me and I could not find much on Sars’s website. I feel that the benefit is on the reinvested funds. And when I have reached my R500 000 limit, the dividends (local or foreign) and all interest that I receive annually in the fund can be reinvested automatically or is the approach wrong?

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Dear reader,

Thank you for your question. I believe that a tax-free investment is one of the most underutilised products and plays a valuable part in your greater financial plan.

You do understand it correctly – all capital growth, dividends and interest earned on the investment are tax-free.

Section 12T(6)(b) of the Income Tax Act, states that: Any amount received or accrued in respect of a tax-free investment, shall not be taken into account in determining whether that person contributed in excess of the amounts contemplated in subsections (4) (a) and (c) as a contribution in respect of that other tax-free investment.

In terms of the definition above, the interest and dividends received/accrued would ordinarily not form part of your annual contribution of R36 000 – provided that it is automatically reinvested by the product provider (ie. not physically paid out). However, contributions in excess of these limits can face a steep penalty of 40%, so we recommend checking with your specific provider that this is the case for the product you are invested in.

Note that the above exemption would not apply if the income was paid out to you, even if you were to reinvest it into a tax-free account again.

 

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I understand if the provider pays out distributions or dividends to another ordinary account, transferring that into a TFSA would be a contribution subject to the limits. If anyone could clarify, what happens when say the ETF provider pays out a distribution or dividend into a cash account inside the TFSA?
Some of my ETFs do this and it has not been considered a ‘contribution’ in the past.

Under TFSA there are two different kinds of accounts. Tax free savings and Tax free investment accounts. Tax free savings have a basic structure likely with an option to pay out to a designated account or reinvest. Automatically reinvested money does not count towards contribution limits. A Tax free investment account usually has a free cash account built in. This free cash can be used to invest in any instrument available without affecting contribution limits in respect to interest and dividends paid back into it. In both cases if interest and/or dividends are paid out to a current account and then transferred back into a TFSA, then it counts towards the contribution limit.

Remember, foreign dividends will attract tax in a TFSA

I’m sorry but I can’t get excited about the TFSA. You can invest up to R36,000 p.a towards a TFSA, with a maximum lifetime contribution of R500,000. Hence it will take 13,8 years to fully utilise the allowance. Are the benefits real? (1) Tax-free interest: At an interest rate of 5% you will need to have R690,000 saved before your annual tax-free portion of R34,500 (over 65yr) of interest is used in any case. For under 65 yr it is R476,000. So no real benefit here. (2) No dividend withholding tax: On shares of R500,000 and a dividend of 2,5% you will receive R12,500 of dividends of which you will save 20% of dividend withholding tax i.e. R2,500. Is that a big deal? (3) Capital gains tax: This depends on the growth you get on the assets when you sell them but the first R40,000 gain qualifies for the annual exclusion in any case. So I am not convinced.

If this is the only investment you have and the only one you intend to draw from in future, then some of your points have some validity.

However, if you started your TFSA when you started working and eventually you turn 70 – you need R 5 m (or whatever) to but a loaf of bread, liquidating all of your TFSA without CGT being incurred could be quite significant.

Many small savings when taken over 50 years of saving add up…

End of comments.

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