People often ask themselves the question – Why do we pay tax?

We might not all agree with the government, but one thing we can agree upon is the tax- free savings accounts implemented since 1 March 2015. Tax–free investments in a tax efficient vehicle have been implemented to encourage households to save for the future. This allows investments in bank deposits, collective investment schemes, exchange-traded funds and retail bonds.

The tax–free savings accounts have an annual contribution limit of R 30,000 and a lifetime limit contribution of R 500,000. If you do not use your allowable R 30, 000 limit in a year, you cannot use the excess amount in the following year (there is no roll over benefit!). Any contributions exceeding the R 30, 000 limit will be subject to a penalty of 40% on the amount of the excess contributions levied by SARS.

 

The benefit of investing in a tax–free savings account is low in the beginning but as time goes on the benefits of compounding interest are realized at the eventual withdrawal stage.

Individuals must try and avoid making unnecessary withdrawals from their tax–free savings account at all costs, as the tax free benefits are lost when withdrawing. Below is an example to demonstrate the point:

  • You make a lump sum investment of R 30,000.
  • Later on, you decide to withdraw R 10,000 for a vacation.
  • You save up the R 10,000 again, and you wish to reinvest it.
  • THIS R 10,000 investment will not be allowed.

If you exceed the annual contribution limit like the example above, you will be subject to a 40% penalty tax. In the example, the 40% penalty will apply to the R 10,000 you wished to re-invest.

 

Most of the product providers are still in the process of developing and structuring their way around the tax-free savings account. You have the remainder of this tax year (1 March 2014 – 29 February 2015) to save the allowable limit of R30, 000. We would therefore suggest that you avoid making a rushed decision at this stage.

Once the competitive market forces have evened out the playing field, we can then recommend a tax–free portfolio to suite your risk profile – one that you are comfortable with.

Stay in touch if you require further assistance!