Tax free investment is the new buzz word since the concept was introduced in South Africa in 2015. The motivation behind this investment is to encourage South Africans to save for retirement. As from 1 March 2015 South Africans can now invest in a tax free investment. Although financial institutions are marketing tax free investments almost daily, not a lot of information with regards to the stipulations of these investments has been communicated to the general public.
Only natural persons (i.e. no companies or trusts) who are residents of South Africa will qualify to open a tax free investment account. The implications for an individual is as follows:
Any South African can invest his or her money in a tax free savings account, which is available at most financial institutions in the country. There is, however, a limit on the amount you can invest per year as well as an overall limit in respect of contributions during your lifetime.
You will only be able to invest up to R30 000 per year in a tax free investment and any amount more than this will be subject to a penalty of 40%. There is also a lifetime limit imposed on this type of savings account, which amounts to R500 000. These restrictions are per person and not per investment, therefore if you have two of three different tax free investments, these investments will all be taken into account to determine if the monetary limits have been exceeded.
Therefore, anything you invest that exceeds either R30 000 per year or R500 000 in your lifetime, will not qualify as a tax free investment.
The benefit of the tax free investment is that if you receive a return in the form of interest, the entire amount will be exempt for tax purposes. You will also not be liable for dividend tax or capital gains tax on any other return.
What most people do not realise is that there is also an annual general exemption available for a natural person (this excludes companies, trusts etc.) with regards to interest income. For the 2016 year of assessment, this amount was R23 800 for persons younger than 65 years and R34 500 for persons older than the age of 65.
To conclude, if you utilise the tax free investment in full as well as plan other taxable investments that will yield interest of R23 800 or less per year, you will not be liable for tax on these investments.
This type of investment presents a tax planning opportunity and it is a smart way to introduce your children to the concept of saving without burdening them with the liability of tax.
Marese Lombard (CA(SA))
University of the Free State