South Africans are not renowned savers-something that government acknowledged when it introduced a tax-free savings opportunity in which all banks have participated.
Since then the ranks of savers has increased, but many who have ignored the ‘Ts and Cs’ that are part of the offering have found that they have made expensive mistakes, says Standard Bank.
Since the introduction of tax-free savings accounts, the amount that can be invested has risen to R33,000 a year. Investors can now save up to R500,000 during their lifetimes without having to pay tax on the interest.
A great opportunity, but says Takumi Daling, savings and investments manager at Standard Bank, it is a tax- break that should be fully understood before an account is opened.
“There is no doubt that everyone should take advantage of opportunities to maximise their income. What many people are unaware of, however, is that there are several conditions attached to the account.
“Failure to adhere to these could result in SARS knocking at your door and asking for a 40% penalty on the over contributed amount earned- something that will take away the joy of seeing your money growing.”
Important factors to consider include:
- That the annual limit that applies to the tax-free interest offer is R33,000.
- Nothing stops you from opening more than one account. However, once the total in these accounts rises above the permitted R33,000, then tax becomes payable on the over contribution.
- Because the annual limit is set at R33,000, opening more than one account and spreading them across institutions will result in the interest on one account being allowed, and SARS demanding 40% of any over contribution beyond that stipulated limit.
- You can only invest R33,000 a year to qualify for the tax-free interest.
Although the lifetime investment limit is R500,000, you cannot make a substantial lump sum investment in the account expecting that as long as the money remains in the account, the interest can accumulate and not be taxed. Again, any over interest on a sum exceeding R33,000 a year will be taxed at 40%.
Realising that withdrawals from the account also has consequences.
It is natural that a financial emergency could lead to a saver withdrawing money from the account, and replacing it later. What must be considered is that this action could lead to extra contributions over the R33 000 yearly limit being taxed.
- You have R33,000 in the account; R10,000 is withdrawn for a family emergency. The balance is then R23,000. However, the SARS approach says that the R10,000 withdrawal remains part of the original investment. Putting R10,000 back in the account, therefore, means that you have exceeded the limit by R10,000 (R43,000) and you will pay tax on the over contributed amount of R10,000.
- Tax-free transfers can be made between a savings account and into a similar account at another.
- Interbank transfers have been allowed since March 2018, but it is essential that all procedures are followed and that the correct documentation is used, otherwise you may be liable to paying tax on the funds as they would have lost their tax free status.
- Knowing that minor children can benefit from a tax-free savings account.
A parent or guardian can open an account in a minor’s name and contribute R33,000 a year. However, once the lifetime limit of R500,000 is reached, the child will not be able to make further contributions to a tax-free account. This would apply regardless of whether the entire amount was withdrawn from the nest egg to pay for studies or other purchases.
If a parent began investing R33,000 a year( and assuming this limit did not change) on the birth of a child and did so every year, the lifetime limited would be reached before the child reached the age of 16. The child would then never be able to open a tax-free account.
“This may seem unfair, but another view is that being able to access such a large sum at a young age would finance a great start to a person’s adult life-something not to be discounted in these tough financial times,” said Daling.
“When the government introduced this tax concession, it did so in the hope that South Africans would begin to take long-term savings seriously. It was this intention that led them to apply the penalty structure to the tax-free savings account.”
“People starting to save, or increase their existing savings, should approach opening a tax-free account to build long-term savings. You may not have the R2,750 a month to take advantage of the full R33,000 limit, but any contributions will have future benefits.”