A year ago, South Africa introduced a tax-free incentive for household savings. The aim was to encourage people to save through regulated institutions such as banks, long-term insurers, managers of registered collective investment schemes, the National Government (retail savings bonds), authorised users (stock brokers) and linked investment service providers may issue and administer these accounts.

Here are some things you should be aware of before you get all giddy at the aspect: 

Through these investments, you won’t need to pay income, dividends or capital gains tax on the returns. The catch? You can only contribute a maximum of R30 000 per year and a lifetime limit of R500 000 and if you exceed the limit, there’s a penalty of 40% on that amount. But the great thing is that the capitalisation earned on your investment does not affect the annual / lifetime limit.

If, however, you withdraw and then reinvest, that reinvestment will be considered as a new contribution and no transfers are allowed during your first year, nor create debit or stop orders or have ATM access.

Siki Mgabadeli of Moneyweb sat down with Nerina Visser to chat about the tax-free investment scheme a year after its initiation into the South African economy. Here’s what she had to say:

Because these are typically referred to a tax-free savings accounts, many people think of them only as something that you can do with a bank, with a savings account – something that you are going to earn interest on. The official term is a “tax-free savings and investment account”.

You also don’t pay tax on dividends, you don’t pay tax on any distribution, you don’t pay any tax on capital gains, which of course in the investment environment, especially over the longer term, suddenly becomes a lot more relevant.

Does the JSE fit into this criterion?

When you look towards the JSE as an opportunity, one of the limits is that it has to be a collective investment scheme, so a unit trust. You are not allowed to buy an individual share or company security for your tax-free account. But of course most of the ETFs that are listed on the JSE are also regulated as collective investment schemes, and therefore qualify.

Other limitations when you look towards unit trusts that are not traded as ETFs on the stock exchange is that you are not allowed to include anything that has a performance-based fee in it.

What about putting money into a savings account?

If you think in terms of, let’s say, even an interest rate of 7%, which is quite a high interest rate for a savings account, on your R30 000 limit that means R2 100 worth of interest that you will earn, which you will now get tax-free. But you already have a lot more tax-free interest that you can earn a year. So putting it into a savings account is really a bit of a waste of your tax-free allowance, because you only have one R30 000 that you can put in every year. So putting that into a savings account means that you are wasting the opportunity that you have of saving all those other taxes also on your R30 000 allowance.

How often can you withdraw?

You can withdraw whenever you want to. There are no restrictions on it. But you cannot re-contribute anything that you’ve withdrawn.

So people must think very carefully before they withdraw from a tax-free account. Even though you are allowed to do it, you are really limiting your own ability to participate in the full benefit of the tax-free account.

The best thing about this is that you’re never too young, nor too old to start saving. The encouragement to do is a great initiative. If have any questions you can ask your EpicTax consultant through their easy chat system, and keep up to date with tax news on their app. It’s pretty legit and may explain things a lot better simpler.

Download the app HERE and get everything done for you!

[source: moneyweb]