When an amendment to the Income Tax Act creating these new vehicles came into effect on March The regulations setting out which investment products might be included in these accounts were, the first flurry of taxfree savings accounts were launched in the first quarter of 2015 however, published in the Government Gazette only days before.
Others will need more time, product providers who had products that were in line with the regulations were able to launch quickly. The advantages of the accounts are simple to grasp.
You can invest only R30 000 a year in a ‘tax free’ savings account, and once the amounts you have invested add up to R500 000, you can’t contribute any more. It is likely that the annual and lifetime limits could be adjusted for inflation in future years, that means that the goalposts may shift before you reach the current limits. It will take you more than 16 years to contribute the maximum amount, So in case you contribute R30 000 a year. That said, as long as the amounts you put in do not add up to more than the annual or the lifetime limit, it does not matter how much growth you earn on your annual contributions.
Pensioners are quick to point out that they may not have 16 years to reach the lifetime limit.
National Treasury is aware of this and Treasury officials say they will, in future, propose measures to allow older people to contribute to the accounts at an accelerated rate. Gonna be included in future if they comply with requirements that have yet to be issued by the Financial Services Board. Either you could be offered funds that do not have performance fees or, I’d say if a fund has more than one class, you could be offered the fund class that charges a flat fee, if an unit trust company has funds with performance fees.
ETPs must be registered as collective investment schemes with an eye to be offered as underlying investments in taxfree accounts.
As long as they are not registered as collective investment schemes, exchange traded notes shall not, the implication is that most exchange traded funds might be available as underlying investments. ETNs are often offered on commodities or illiquid shares, just like those listed on African stock markets. Instead, your money can be invested in derivative instruments that the ETN provider expects will deliver the promised returns. Of course a ETN provider promises only to deliver the return of a selected security, commodity or market, and may invest in that security, commodity or market only partially, or not all. Whereas collective investment schemes must invest in the underlying securities, just like shares or bonds, local ETNs do not always invest in underlying securities.
The regulations specifically exclude any investment products in which part of the return is withheld from you. Structured products typically have a fixed term and offer a limited percentage of the performance of a market index and use the balance to offer you a capital guarantee. In ‘smoothed bonus’ portfolios, some investment returns are withheld from you in years of good returns, and are used to provide you with a better return in years when returns are bad. It’s a well the underlying investments in a taxfree savings account can’t include structured products or ‘smoothed bonus’ portfolios.
National Treasury and the FSB plan to develop regulations for these complex products by the end of this year.
a certain amount these products could become eligible for inclusion, if a customer friendly framework had been developed. Because collective investments must comply with the diversification requirements and maximum holding limits in the Collective Investment Schemes Control Act, therefore this does not apply if the underlying investment is a collective investment. Investment may not invest more than 10 percent in a single share or commodity, and 80 the shares percent must be listed on a stock exchange, Therefore in case the value of the underlying investment is determined directly or indirectly from the value of shares.
National Treasury and the investment industry explored various ways to prevent the tax positive parts of the savings accounts from being abused, and they settled on a penalty for contributions that exceed the limits. Any company I’d say in case you open two or more accounts with different companies. The regulations under the Income Tax Act prevent financial services companies from accepting contributions that exceed the annual or lifetime limits. In most cases, a company can monitor only the investments that it holds.
Every tax year, companies must report how much you have invested in their ‘tax free’ savings accounts to the South African Revenue Service, that will enable SARS to determine whether you have contributed more than is permitted.
The penalty applies in the tax year in which you make the excess contribution. The Income Tax Act provides for a stiff penalty tax of 40 percent on any amount you invest in an account that takes you above the annual or lifetime contribution limit. Anyways, sARS will expect you to complete a tax return and will issue you with an assessment, and you will have to find the money to pay the tax.
I’d say in case, in one tax year, you invest R20 000 in an account with one provider and R20 000 in an account with another provider, you will have contributed R10 000 more than the annual limit. Treasury has calculated that it will work in your favour to pay the ‘once off’ penalty of 40 percent only if your savings in the account had earned a relatively high return for a very long period. SARS will levy tax of 40 percent on the R10 000 excess contribution.
As pointed out by the regulations under the Income Tax Act, you must be able to withdraw your investments easily from a ‘taxfree’ savings account.
The formula takes into account. You must be able to access your money within seven requesting days it, if the investment has no maturity date. Those that offer investments with a guaranteed return, just like a particular interest rate for an investment for a defined period, similar to a fixed deposit, can charge a penalty that is the higher of R300 or the value in line with a formula. Investment providers are not allowed to charge high penalties for early withdrawals.
In which returns are not linked to an interest rate, is R500, and the penalty must gradually decrease to zero if the investment is held for five years or more, the maximum penalty for products that have a maturity date. Withdrawals are not taken into account when your annual or lifetime limits are determined. It’s a well if you contributed R10 000 in similar year, you should exceed the annual limit and be penalised. You contribute R30 000 and withdraw R10 000, your net contribution is R20 000.
Highincome earners may think that the R30 000 annual and R500 000 lifetime limits are Besides, the growth on investments in these accounts can be significant over time, and there may be a considerable saving on CGT when the investment is realised. Alexander Forbes based its calculation on a balanced fund with 70 percent in equities, 15 percent in bonds and 15 percent in cash. With that said, alexander Forbes calculates that if you save R30 000 a year in a typical South African balanced fund within a tax free savings account until you reach your lifetime limit of R500 000, and the fund earns returns similar to could’ve added growth on your investment of just under R1 million after 20 years.
It’s an interesting fact that the longer you leave your savings invested, the more they accumulate, thanks, particularly, to the saving on CGT, john Anderson. Says Alexander Forbes’s calculations show that the benefits are low initially. Anderson says that, despite the tax saving is only R10 000 in the 10th year and R70 000 in the 20th year, the compounding effect is a saving of almost R1 million after 20 years, compared with the return on an investment on which taxes are payable.
Nedgroup Investments cites an example of a R2 000 monthly contribution to a tax free savings account should be multiplied 5 times after 20 years and the tax saving would’ve been R150 Similarly, Nedgroup Investments says if the money is invested in a property portfolio in a tax free savings account targeting inflation plus 5 percentage points, the contributions could’ve been multiplied 8 times after 20 years and the tax saving will be R175 000.
In an update on a recent article on his website, the Index Investor fund are taxdeductible, within certain limits.
As long as you make contributions with earnings on which you have not paid tax, your retirement fund has the edge, with both a tax free savings account and a retirement fund. Income tax on interest or CGT. Remember, employers can make contributions to your provident fund and deduct these from their taxable income. They are expected to become so in future, possibly from March 2016 or 2017, an employee’s contributions to a provident fund are not taxdeductible.
If you are on a marginal tax rate of 31 percent, 31 any cents rand you contribute to a retirement fund is a tax saving. The first R500 000 even if you pay tax on the lump sum withdrawal at retirement and the annuity you purchase is taxed at your marginal rate. You can contribute only 69 cents for any rand you earn, instead of the entire R1 with ‘taxdeductible’ contributions to a retirement fund, Therefore if you contribute to a taxfree savings account or a discretionary investment.
In a recent newsletter, Freddie Mwabi, an actuarial specialist at Simeka, a retirement fund consulting company in the Sanlam stable, illustrates the point with the following example calculated using the 2014/15 tax rates.
Investment may be worth R1 468 000 after 20 years, So in case the money is invested in a retirement fund that earns an annual return equal to an inflation rate of six percent plus five percentage points. While escalating at salary inflation, that is assumed to be the inflation rate plus two percentage points, R10 000 a month and his employer contributes R1 000 a month to a provident fund for 20 years.
In comparison, I’d say in case the 40 year old was paid another R1 000 a month, and he paid tax on it and deposited the ‘after tax’ amount in a ‘tax free’ savings account, his savings after 20 years would’ve been worth R1 075 000. At a return of five percent above inflation, therefore this makes a difference of R220 000 in the returns earned from the retirement fund, compared with the ‘tax free’ savings account. So, the difference is that the investor has R567 000 paid into his retirement fund by his employer, whereas he has only R340 000 to pay into the ‘taxfree’ savings account.
If you have used your entire retirement fund tax deduction, or you need to withdraw your savings at any time, taxfree accounts offer a way better deal than any other discretionary investment.
In the exercise, Mwabi assumed quite similar cost structure for all three investment types. The example illustrates that the savings are greater for ‘higher earners’. He says the differences are bigger if the costs of every investment type are taken into account. Mwabi’s example assumes the man earns R100 000 a month, that means he paid tax at the highest marginal tax rate of 40 percent in the 2014/15 tax year.
Because you should get the additional R12 000 as a tax saving, wessels says a taxpayer on a marginal rate of 40 percent would save R12 000 a year making a difference to your financial position. Assuming you earned a real return of six percent from either fund, your investment values right after 16 years and eight months must be R860 037 in the taxfree account or R1 204 052 in the retirement fund. Basically pay the relevant tax on the retirement fund savings, Wessels calculates that, at a drawdown rate of five percent, these savings could produce a ‘after tax’ income of R42 141 a year, if you take the full onethird of the R1 204 052 as a cash lump sum and use the balance to buy a pension.
These assumptions show that a taxfree savings account will give you a slightly better income than a retirement fund, Wessels says.
At a marginal tax rate of 30 percent or less, the retirement fund will yield a slightly better outcome. Anyways, the exception is where the account is offered as a life assurance investment policy. Seriously. Wessels says you’d better consider that retirement fund assets are protected against the claims of creditors -in other words, retirement fund assets do not form part of your insolvent estate and can not be attached by a creditor, whereas a taxfree savings account does not have this protection.
I’d say in case they are in a RA fund, another aspect to consider is that you can withdraw your retirement savings only when you retire or resign from an employer sponsored fund or, from the age of 55, whereas your savings in a ‘taxfree’ savings account are always available. The Estate Duty Act has not been amended to exempt the amounts in the accounts. Your investments in a ‘taxfree’ savings account should be added to your estate and be subject to estate duty after the exemption of R35 million, when you die.
Accordingly the returns from the investments will remain exempt from income tax and dividends withholding tax, and your estate won’t be liable for CGT when the investments in the account are disposed of on your death.
Now look, the amount transferred may be regarded as a contribution by the beneficiary to other people, nor you
Proceeds from the policy can be distributed to him or her before your estate is wound up, Therefore if a life assurance investment policy is an underlying investment in your taxfree savings account and you nominate a beneficiary. Because the amount could be an asset in your estate, you should not escape estate duty, you will also save on executor’s fees on the investment. As long as they are competing for your savings, a lot of product providers appear to be pricing their tax free savings accounts attractively. In consonance with the regulations under the Income Tax Act, the fees you can be charged for investing through a ‘tax free’ savings account must be reasonable.
Many providers are not levying charges on their ‘tax free’ savings accounts, only on the underlying investments.
So this fee is negotiable, you will pay an advice fee if you invest through a financial adviser. Where costs are incurred to set up the fund, the taxfree savings account isn’t a structure and requires only different reporting to that of a discretionary investment, unlike a retirement fund. That’s where it starts getting intriguing. Charges apply only to the underlying funds, Most unit trust companies are not charging fees for investing in their ‘taxfree’ savings accounts.
Some do not, linked investment services providers and investment platforms typically charge an administration fee. In the past, investment platforms received undeclared rebates from unit trust companies, that may or may not was passed on to you as a reduced administration fee. While a separate administration fee reflects the charge collected by the platform provider, plenty of Lisps have now introduced what’s known as clean pricing, that means that unit trust fees reflect what the unit trust companies actually charge to invest through the platform. Without administration fee. Is offering. Five ‘index tracking’ funds on its lchemy investment platform, no platform fee and an annual management fee of only 4 percent.
Check the total fee you will pay if you invest in a certain class of fund, and don’t forget that there can be costs for switching between funds, Therefore in case you invest through an investment platform.
Investment platforms say they have alternative flatfee classes for funds that will normally charge performance fees, investments that charge performance fees can’t be included in tax free savings accounts. Proposals in the RDR suggest that this practice may not be allowed in future, some investment platforms offer cheaper fees on funds offered by an unit trust company that is within their own group. Nonetheless, these can be the old R classes, where fees were typically one percent, or newer classes.
Old Mutual, let’s say, is offering a taxfree savings account with an administration charge of 75 percent for an investment that enables you to access a range of unit trust funds from top managers. Old Mutual says it will reduce the administration fee to 5 percent if you agree to invest only in Old Mutual funds, and the fee gonna be reduced by half if you invest the maximum allowed annually, R30 000.
Sanlam Life is offering a tax free investment policy with the investments in unit trusts and Satrix ETFs. I am sure that the fee discount is depending on the amount invested by the group in the tax free accounts. For instance, the fee may be 825 percent, Sanlam says, I’d say if the group’s investment is R500 000. It’s a well this can be discounted as low as 2 percent for group investments once the group has invested R1 million, the administration fee for the policy is a relatively high 45 percent. There could be asset management fees on the underlying funds.
Sanlam says an investor group should be set up by a financial adviser for should be a number of friends or a family.
So in case your employer enables you to make contributions through its payroll system, you can save on the debit order charges that come with making a contribution as an individual. Consequently, anderson gonna be able to offer ‘taxfree’ savings accounts that can be priced for a group. Now look. Accounts, however, remain in the name of the person who opens the account.
Franscois van Gijsen, a member of the Fiduciary Institute of South Africa and director of legal services at Finlac Risk and Legal Management, says this provision in the regulations addresses the potential abuse of the account by parents who use their child’s tax benefit for themselves by fraudulently purporting to contribute on behalf of a minor child. Parents have signing powers on their minor children’s bank accounts, Van Gijsen says. Besides, the lifetime contribution limit means that parents who do abuse a child’s taxfree investment could be restricting their child’s ability to contribute to taxfree investments in future.
You can’t convert an existing investment into an investment within a tax free savings account, or have an existing investment reclassified as a ‘taxfree’ one.
You will have to cash in your investment and reinvest, even if you are investing in really similar unit trust fund, let’s say, through a taxfree savings account, So if you look for to transfer an investment to a ‘taxfree’ account.
National Treasury is considering allowing ‘low income’ earners who have inappropriate life assurance savings products to convert them into ‘tax free’ savings accounts. Treasury will, in consultation with product providers and SARS, develop regulations that will allow you to transfer your investment to another provider without this being regarded as a completely new investment. This is a reference to people who pay tax at an average rate of less than 30 percent and who are invested in endowment policies in which the life assurer pays tax on the policyholder’s behalf at a rate of 30 percent. Nonetheless, in the first year in which tax free savings accounts are offered, you won’t be able to transfer your ‘taxfree’ savings from one provider to another.