To promote an increase in household savings, the National Treasury has announced that they will introduce legislation that allows for the provision of Tax Free Savings Accounts from March 2015. The main aim of the introduction of this new product is to encourage South Africans to save more to provide for times of need as well as their medium to long term needs.
The key principles which the product must follow, as required by National Treasury, are:
- A simple product which is easy to understand.
- Clear disclosure on the costs involved from the inception of the product, including any intermediary fees.
- Each investor should ideally have a customized financial plan where the suitability of this account is based on the investor's circumstance.
Growth on your investment is completely tax free. This means:
- Capital Gains Tax is the tax charged on increases in the value of your investment. With the tax free savings, there is no Capital Gains Tax when you access your money or switch between funds.
- Dividend Withholding Tax is a tax charged on all dividends earned in an investment. With the tax free savings, there is no tax on dividends.
- Interest Income Tax is a tax imposed on any interest earnings in an investment. With the tax free savings, there is no tax on any interest earned within the plan.
- When you withdraw your money from some investments, you may be taxed. Depending on the type of investment, this tax could be on the lump sum you take out and/or on the income stream you derive from the investment.
National Treasury has prescribed certain structures which all providers will be required to adhere to when offering a tax free product.
- Contributions are subjected to an annual limit of R30 000 and a lifetime limit of R500 000. The annual limit will work on a ‘use-it-or-lose-it’ principle and there will not be any roll-over for unused portions of prior years. For regular investments, the annual limit equates to a maximum monthly premium of R2 500 over the full tax year.
- If you have tax free plans with more than one company, the maximum of R30 000 per tax year applies across all your tax free plans, not per plan.
- The South African Revenue Services (SARS) will levy a tax of 40% on all contributions which exceed R30 000 per tax year.
- Remember the tax year is from the beginning of March to the end of February the following year.
- Customers can disinvest at any time from their tax free savings.