The concept of a tax-free savings account was introduced by Treasury in the 2013 Budget with an effective date of 1 March 2015.
What is a Tax-free Savings Account?
Section 12T defines the account as a financial instrument that is administered by a person or entity as prescribed in the regulations, held by a natural person or a deceased or insolvent estate of that natural person. Companies, Close Corporations and Trusts cannot invest in the tax-free savings account.
The primary objective of the tax-free savings account is to encourage individuals to save, therefore reducing their reliance on debt and their vulnerability when unforeseen financial obligations arise. This will also increase the overall level of savings in the economy.
Treasury indicated in a statement, alongside the draft notice and regulations for these accounts, that licenced banks, long term insurance companies, collective investment scheme managers, authorised users, Administrative FSPs and the Government will all be allowed to offer these savings accounts.
An income tax exemption shall apply in respect of any amount received by an individual from a tax-free savings account. A capital gains tax exclusion will also apply to any capital gains from this investment. All interest and dividends earned from this investment are exempt from income tax.
Contributions
An individual may contribute up to R30 000 per year to this tax-free savings account and contributions are limited to a lifetime maximum of R500 000. Contributions exceeding these limits will be heavily taxed. An amount equal to 40% of the excess amount contributed is deemed to be an amount of normal tax payable in respect of that year of assessment.
Investment Term
This is a liquid investment, as it must be paid to the investor within seven days of receipt of the request to withdraw funds. The maximum contractual term of this tax-free savings plan is seven years.
Restrictions on Asset Classes
Not more than 10% of the total value of the investment may come from shares in a single company or from one commodity. Not more than 30% of the total value of the investment may come from financial instruments where the instruments have been assigned a foreign currency sovereign rating lower than that of South Africa.
Whilst Treasury is trying to limit the amount of risk the investors are exposed to, it may result in managers who choose to participate in this space to use very conservative products which may not deliver the investment returns needed to beat inflation.
Fees
Products that charge performance fees will not be allowed to be included in tax-free savings accounts. Fees may also not be based on the time period for which the investment is held. Policies that pay bonuses if the investor remains invested for a specific period of time will also be prohibited. These types of products do not adhere to the principles of simplicity, transparency and suitability that Treasury has set as benchmarks for inclusion. Performance fees fluctuate a lot and it can become costly.
Early termination fees may be charged but there is a restriction on the amount of fees that may be charged when a withdrawal is made.