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6 Jan 2015

TAX FREE SAVINGS ACCOUNT IN SOUTH AFRICA

Do you have any plans to use the soon to be launched non retirement tax free savings account in South Africa? I am asking because a number of us have been complaining about lack of motivation for savers as a direct result of a low tax incentive on interest income. I personally felt that our government has some dislike towards savers. It seems not. As from March 2015, we will have access to a new tax exempt savings and investment accounts.


non retirement tax free savings account
The South African government has hinted on the new policy to encourage households to save for a few years now. Who can blame them though. Living within our means is somewhat foreign to us. If you are not convinced, go check the employee car parking area in your workplace. I am not talking the CEO/ Managing Director/ Executive allocated parking bays because you may be surprised to see the opposite of what you expect there. We have a culture of spending and we embrace materialism. We are not big on buying experiences like travel and exploring our amazing nature reserves. But hey, we do seem to be a happy crowd. And if you dare resist the pressure to fit in, you will be bombarded with questions: When are you buying a car? (even when you are driving one); So you don't like nice stuff? (meaning very expensive clothing or furniture); Don't you think you deserve better? (meaning you should be swiping a credit card as a symbol of sophistication)...

In reality, it is in the interest of the state to encourage citizens to save. We cannot achieve sustainable  economic growth without sufficient and continuous household savings. Before we look at the details with our magnifying glasses, I have to encourage us to consider taking advantage of this with the highest level of sobriety. Apart from the annual and lifetime limits that bring complexity to this one, anything that has a tax incentive or labelled tax free should be great. That includes your retirement annuity (RA). I do hope that readers of this blog will throw themselves at this one.

The Basics of the Non retirement Tax Free Savings Account in South Africa
  • One is limited to a maximum contribution of R30,000 per year and R500,000 lifetime contribution initially. This is at most R2,500 per month over a period of 12 months. Assuming that one exhausts the limit every year, they have close to 17 years of contribution period. This contribution limit will be reviewed and adjusted with inflation.
  • One can use the approved bank accounts, collective investment schemes, exchange traded funds (ETFs) and retail savings bonds to access this tax incentive.
  • One should only use the accredited financial service providers viz. banks, asset managers, life insurers and brokerages to access these tax-exempt savings accounts.
  • Amounts that are withdrawn cannot be replaced at a later stage. Once withdrawn, one cannot get the same tax benefit by replacing the withdrawn amount.
If I were allowed to be ungrateful just for a moment, I would complain about the R30,000 annual contribution and especially the R500,000 lifetime contribution limit of this non retirement tax free savings account. Those are tiny amounts. Do not blame me, I am just being a typical South African.  The current incentive does not immediately replace the existing interest income tax exemptions. You probably know that a maximum of  R1,983 and R2,875 monthly interest earned is tax free currently. An example will be interest you earn from your money market account. This translates to an annual tax exemption of  R23,800 interest income for persons below 65 and R34 500 for people above 65. This is the tax incentive that will be replaced by the new one over time.

Be on the lookout for these types of accounts from March 2015. I definitely will. Exercise caution as not all savings accounts and investment products will carry this tax free benefit. Remember that it is not for an emergency fund type of purpose as withdrawals are discouraged with some sort of a penalty. Once you decide to save/ invest to benefit from this tax incentive, do it as a "save-and-forget about" type of decision. It seems to me that this will be implemented using the existing simple accounts and investments we are familiar with.

My take on this proposal is that, it will be more beneficial to those using high interest/ return saving vehicles like ETFs. This should translate to zero tax on dividends, fund growth and capital gains during the investment disposal. The details do get complex to imagine especially given the limit and possible withdrawals. Tracking systems will obviously be in place, so that should not give us sleepless nights. We should also treat it as a long term investment tool. You only have R500,000 chances of benefiting in your lifetime. thread with caution.

What do you make of this non retirement tax free savings account in South Africa?

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