Tax-free savings accounts (TFSAs) hold definite benefits for their users, but many South Africans are still uncertain how these accounts work.
Considering the rewards you could reap, it is definitely worth investigating.
New to the scene
When one takes into account just how new TFSAs are on South Africa’s financial playing field, it is understandable that most of us are still vague on the details.
“Tax-free savings accounts came into effect as of 1 March 2015, which means that the 2016 tax year was the first year of its existence,” says Ockert Fourie of Blue-Chip Consulting Services.
In Fourie’s own experience, it is mostly upper middle class to wealthy South Africans who currently hold TFSAs, but he encourages more people to make use of this saving tool.
“It is a fantastic product and every person who has up to R2 500 per month to invest, should do it,” he says.
How TSFAs work and how you could benefit
According to Fourie a few organisations, most commonly banks and long-term insurance companies, are permitted to operate TFSAs.
The benefits are fairly clear-cut, as Fourie explains: “You do not pay any income tax, dividend tax or capital gains tax on the growth in your investment. In addition, the transactional charges on these products are very low, so it is an easy and cheap way to invest.”
TFSA holders also enjoy unfettered access to the account.
“You make contributions as and when you please, and you may withdraw the funds whenever and incur no penalties,” says Fourie.
What about the fine print?
While TFSAs are far from too good to be true, there are a few things to keep in mind. It is important to know that you may not contribute more than R30 000 per year and only R500 000 in your lifetime to TFSAs.
“This applies to all your tax-free savings accounts added together, and not per account,” Fourie elaborates.
Only R30 000 per year may not seem like enough of a contribution to make a TFSA worthwhile, but a 2015 article by Laura du Preez in Personal Finance magazine notes that “the growth on investments in these accounts can be significant over time, and there could be a considerable saving on CGT (capital gains tax) when the investment is realised.”
Take care not to exceed the prescribed limits, as the penalties are substantial. “If you exceed the monetary limits, you will be penalised at a rate of 40% of the amount that exceeded the limits,” Fourie warns.
Furthermore, Fourie says that TFSAs are only available to natural persons. This means that only individuals, and not companies or other entities, qualify for a TFSA. Simply put: you can open a TFSA in your own name, but not in your company’s name.
Du Preez also mentions that the Estate Duty Act has not yet been amended to make exceptions for amounts invested in TFSAs.
“When you die, your investments in a tax-free savings account will be added to your estate and be subject to estate duty after the exemption of R3,5 million,” she writes. She goes on to add, however, that “the returns from the investments will remain exempt from income tax and dividends withholding tax, and your estate will not be liable for CGT when the investments in the account are disposed of on your death.”
Make an informed decision
It is important to understand where your funds are being invested by the organisation offering the product.
“Ask questions and ideally select those funds that invest heavily in shares and property,” Fourie advises.
Fourie also recommends making use of the existing tax-free interest exemption of R23 800 per year (if you are under 65 years of age) for your cash investments.
¦ To learn more about TFSAs, read Du Preez’s article at http://www.iol.co.za/business/personal-finance/tax/tax-free-savings-accounts-what-you-should-know-1921253.
