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Wednesday, May 7, 2014 - 09:26
Positive proposal

South African investors, who have become used to the benefits of zero tax on interest, dividends and realised capital gains within retirement funds, are one step closer to enjoying the same tax-free status on interest, dividends and realised capital gains on investments outside of retirement funds.

This is according to Wilhelm Söhnge, Advisory Partner at Citadel Wealth Management, who says National Treasury has recently released a discussion paper on non-retirement savings, specifically dealing with the proposed new tax-free savings accounts. “The main aim of the introduction of the new product is to encourage South Africans to save more, in order to provide for times of need as well as their retirement.”
If all goes according to plan we will see the introduction of the tax-free savings accounts in 2015, says Söhnge. “Investors will be able to hold familiar investments, like units in collective investment schemes, savings accounts, fixed deposits and retail savings bonds, through the proposed new product. A combination of these investments can also be held in a single account, should the product provider offer the facility to do so.”
He says individual South African tax payers pay tax on dividends at a flat rate of 15%, irrespective of their other income. “Interest earned above the annual exemption of R23 800 (R34 500 for taxpayers over 65 years of age) and 33% of realised capital gains above R30 000 is included in income for tax at the scales applicable to individuals.
“The proposed new product widens the tax-free investment universe to include other investment vehicles, such as equity investments, by not only allowing for tax-free interest but also for dividends and realised capital gains.”
It is proposed that contributions to the tax-free savings account will be limited to R30 000 per investor annually and a R500 000 cumulative life time limit will apply. “These limits may be reviewed in future and adjusted for inflation. The R30 000 annual limit will work on a ‘use-it-or-lose-it’ principle and there will not be any roll-over for unused portions of prior years. This is to encourage investors to start saving earlier and save regularly over the long-term.”
He says Minister Pravin Gordhan did not propose an increase in the interest exemption in this year’s National Budget. “The discussion document also states that it is the intention to keep this exemption at current levels. The objective is for the annual R30 000 to make up for this decrease in real terms and give investors time to gradually adjust their investment portfolios to the new tax regime.”
The discussion document proposes that investors will be allowed to open a maximum of two accounts per year, but where contributions are made to more than one account the annual limit of R30 000 will be applied to the aggregate contribution to both accounts.
Although the intention is to encourage long-term saving, the product itself will have no minimum term and, depending on the underlying investments, funds should be available immediately in times of dire need, he says. “Obviously an investor should still ensure that the underlying assets within the tax-free savings account match his/her investment horizon. For example, an investor who will most likely require funds from their tax-free savings account in the short-term should probably avoid investing in an equity unit trust. However, withdrawn amounts cannot be replaced, as the normal annual contribution limit will apply.”
He says that although a wide range of existing savings products will be available through the tax-free savings accounts, direct share portfolios will apparently be excluded. “We assume this will be done to avoid providing a vehicle where active speculative trading can be done in a tax-free environment. Products that include derivatives, which are not directly used as a hedge within a pooled investment, would also not be permitted.”
Institutions like banks and collective investment scheme management companies will be authorised to market tax-free savings accounts to the public. “Consumers can expect most, if not all, major players in the financial services industry to launch versions of this product in 2015. However, their products will have to comply with certain criteria to qualify. It is National Treasury’s aim to keep these products as simple as possible, to allow for full transparency and ensure suitability for investors,” notes Söhnge.
The draft legislation and regulations are due out July 2014.

Copyright © Insurance Times and Investments® Vol:27.5 1st May, 2014
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