Tax-free Savings Account

National Treasury introduced a new tax-free savings account (TFSA). Government hopes that this investment product will encourage South Africans to save more and subsequently reduce household indebtedness and vulnerability. But what is this TFSA and how does it fit into an individual’s investment planning?

According to Treasury’s TFSA regulations, individuals are allowed to contribute no more than R30 000 a year, capped at R500 000 over a lifetime, into these accounts. All returns (interest, dividends and capital gains) are tax-free. Returns that are re-invested into these accounts are not considered contributions.

A tax penalty of 40% will be levied on excess contributions above the R30 000 annual threshold. Individuals are allowed to have multiple investments with multiple service providers, but investors are responsible to keep track of their contributions – in particular to ensure that they do not exceed R30 000 per year. The contributions will have to be reported to SARS at the end of every tax year.

Suitable products on offer vary widely and include fixed deposits, unit trusts, government savings bonds, certain endowment policies and Exchange Traded Funds (ETFs) – classified as collective investment schemes. Product providers must ensure that the products are simple to understand, transparent and suitable for investors.

Current investments held by individuals may not be directly converted to TFS accounts. These investments have to be withdrawn (subject to penalties, tax and product rules) and reinvested into a TFSA. In many cases the cost of such a withdrawal is more than the tax-free gain, so investors should ensure that they do a proper analysis of the effects of such a change first.

Unit trust funds charging performance fees will not be allowed as underlying investment choices of the TFSAs. This significantly reduces the range of unit trust funds available to investors. Treasury did however indicate that the current approach, together with other regulations, will be reviewed in the future. This includes the current lifetime contribution limit of R500 000. Product providers are hopeful that the lifetime limit will be increased at least with inflation, allowing investors to take advantage of the long-term benefit of tax-free gains.

A TFSA is ideal for supplementing retirement savings and should be used as a complimentary investment solution to existing retirement products – like retirement annuity funds, which have tax benefits of their own. The tax benefits and product rules of retirement products outweigh the benefits of a TFSA and therefore it should only be considered if the full tax benefit of retirement products has been utilised.

Autus Fund Managers does not have a fund on offer yet, but should be ready in the near future. The majority of investment houses are also yet to release TFSA instruments. We are waiting for confirmation from all product providers before we advise our clients to invest in these products.

The true benefit of these accounts would be an improved savings culture in society at large. For the individual, it would be the added value of compound investment growth. These accounts should be used as long-term savings instruments in an effort to contribute to future capital needs – retirement in particular.

Autus recommends that individuals consult their financial advisors first before investing in this vehicle. There is reason to be excited about this product, but that does not necessarily mean it is the most appropriate product for every savings need.

By autusco

Wednesday, June 17th, 2015

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