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?
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.