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The new tax-free savings account: simple, transparent and suitable

By Denver Keswell, Senior legal advisor

SA savings stats are poor despite initiatives to increase tax concessions on savings products

Just about every year National Treasury introduces new ways to encourage South Africans to save more, usually via the Budget or changes to tax legislation. Retirement reform plans to increase the tax deductions individuals can claim on retirement fund contributions for the majority of South Africans. The tax-free portion of a lump sum received from a retirement fund has recently also been increased. Despite these impressive ongoing initiatives, we still see concerning statistics about a poor savings culture in South Africa.

A new savings account will allow tax-free growth

With this in mind National Treasury plans to introduce a tax-free savings account (TFSA) on 1 March 2015. This new savings account will effectively allow South Africans to contribute to a product that will not attract any tax. Is this too good to be true? Let’s take a look at how the TFSA will work:

  • Contributions to a TFSA will be limited to R30 000 a year. Any amount over R30 000 a year will be taxed at 40% in that tax year.
  • A lifetime contribution of R500 000 in aggregate will be applied. Any contribution above this will be taxed at 40%.
  • An individual can invest in more than one account but will still be subject to the same penalties mentioned above.
  • Any interest, dividends and capital gains from these investments will be tax-free in the individual’s hands.
  • No tax will be reversed on over contributions.

Consider the effects of early withdrawals on a TFSA:

Given the tax concessions mentioned above, why then wouldn’t you invest all your liquidity (up to a maximum of R30 000 a year) into a TFSA? Even though TFSAs will be liquid investments, it is important to consider the effects of early withdrawals on a TFSA:

  • To get the maximum benefits of the tax concession you need to ensure you receive tax-free returns on your contributions over as long a period as possible knowing you have a lifetime contribution limit of R500 000 which may be adjusted from time to time to counter inflation.
  • You will not be able to “replace” any money you withdraw and any withdrawals will reduce your tax-free growth.
  • It is thus extremely important to consider when you may want to access any contributions you have made before deciding to invest in a TFSA.

TFSAs will be simple, transparent and suitable

It would appear that the proposed tax-free savings account is truly an ideal opportunity for South Africans who haven’t started saving, as well as those who simply want to benefit from the tax concessions provided.

National Treasury has emphasised that three overriding principles govern their decisions on TFSAs - simplicity, transparency and suitability. To offer a product like this, providers will need to ensure that the products are set up in a specific way. For example, exorbitant exit penalties and certain fee structures will not be allowed. The exact characteristics with which these products must comply will be set out in regulations scheduled to be released towards the end of this year.

We are looking at ways to help you benefit from a TFSA

The unit trust industry is excited about the opportunities TFSA’s will offer investors. Unit trusts are already set up in a way in which TFSAs could be easily accommodated. Nedgroup Investments is exploring ways to accommodate existing unit trust holders who want to benefit from a TFSA, as well as ensuring that our product structure for TFSAs will be in line with regulations imposed by the National Treasury.

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