How to invest tax-free

Support for multiple savings accounts; direct share investments still not allowed.

JOHANNESBURG – Investors will likely be allowed to open multiple tax-free savings accounts in future.

This follows the publication of the Taxation Laws Amendment Bill earlier this month, which put forward amended proposals to introduce these accounts from March 1 next year. An earlier discussion document recommended that investors should only be allowed to open up to two of these accounts per annum.

The tax-free savings account will permit investors to invest in most unit trusts, bank savings accounts, fixed deposits, retail savings bonds and exchange-traded funds (ETFs). All returns on the investments via these accounts, which will be offered by most financial services providers, will be tax-free in the hands of the individual, regardless of whether it is dividends, capital gains or interest.

However an annual contribution limit of R30 000 will apply to the contributions across all tax-free investments and no further contributions will be allowed once an individual reached their lifetime contribution limit of R500 000.

Christopher Axelson, director for personal income taxes and savings at National Treasury, says they realised that the number of accounts would not make a substantial difference. The financial service provider would provide the investment information to the South African Revenue Service (Sars) and the investor (through an IT3 document), which Sars could easily summarise for each taxpayer.

Allowing multiple accounts was easier for all parties involved and provided more choice for the individual. Moreover, it would have been difficult to stop investors from opening additional accounts (more than two a year), he says.

Like previously mooted, direct share investments will not be allowed in these accounts although investors would be able to get equity exposure by investing in an equity-only unit trust.

Over contribution penalties

The previous discussion document proposed two potential options for dealing with contributions in excess of the annual limit of R30 000. The first suggested a reversal of over contributions and earnings while the second recommended that general tax rules should simply be applied.

In the latter alternative, the proportion of interest, dividends and capital gains in the account that related to the over contribution, would have been subject to normal tax at the individual’s marginal rate, without applying any exemptions.

Axelson says feedback from industry highlighted that the first proposal would be administratively burdensome to implement, which could result in higher costs for these accounts.

The current proposal is for a taxpayer who contributes in excess of the annual and lifetime limits in any year, to be subject to a penalty of 40% of the amount of the excess contribution, which will be levied by Sars.

If proceeds on over contributions were taxed at the individual’s marginal rate, a situation could arise where an individual who did not pay tax in a particular year, would pay a 0% penalty on these returns. In these instances, it would have been easy for taxpayers to contribute funds substantially in excess of the limit and to grow it tax-free within the account, he explains.  

Axelson says using the marginal rate could actually have been quite an incentive for individuals to put in more and would have defied the aims of the original policy.

A simple, flat number is easy for everybody to understand and sufficiently punitive for taxpayers to appreciate that it would not be in their benefit to contribute more, he says.

Estate

But what happens to tax-free savings in the event of the taxpayer’s death?

In terms of the bill tax-free investments will be added to the estate of the taxpayer for purposes of levying estate duty.

“While the investments are held within the estate, the returns from these investments will continue to be exempt from income and dividends tax. However, the amounts within the tax-free investments cannot be transferred to their beneficiary’s tax-free investments. Any transfer of tax-free investments from one individual (or his estate) to another will be deemed to be a contribution and subject to the annual and lifetime contribution limits of the recipient,” the explanatory memorandum states.

* Written comments on the Draft Amendment Bills must be submitted to Treasury by August 17, 2014. 

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