National Treasury has released new draft regulations about the tax-free savings accounts, due to be introduced next year. Treasury has been wanting to introduce a tax free savings product for a while now that is easy to understand and not too risky.
"The draft Regulations follow the principle that products qualifying as tax free savings and investments should be simple to understand, transparent in their disclosure and suitable for the majority of individuals making use of such savings and investment products," said Treasury. We look at ten things that you need to know about tax-free saving accounts before they are finalised.
1. When will they be available?
Treasury has said that the tax-free savings accounts will be ready by 1 March 2015. Therefore, any other amendments or comments to be made to the draft Legislation must happen soon.
2. How much can I invest?
You are allowed to contribute up to R30 000 per year in tax-free savings account with a lifetime contribution limit of R500 000.
You will also be allowed to open one or two accounts per year, where you may invest in either interest bearing or equity instruments or both types of investments in each account, but total contributions for the tax year may not exceed the annual limit of R30 000.
3. Why is government introducing these products?
The objective of the tax free saving accounts is to encourage people to save, which would reduce their financial vulnerability and reliance on debt when there are unexpected shocks to their normal income or sudden large expenditures explained Treasury. It will also decrease the reliance on the State as there will be fewer people applying for the state pension.
4. What are the penalties?
The penalties for going over either the yearly or lifetime limit are severe. The amount which is over the limit will be taxed at 40%.
For example, if there is R15000 in one savings account and in the other there is R20000, which gives a total of R35000. This total is R5000 over the annual limit. A penalty of 40% percent on the R5000 will have to be paid.
But the excess contributions of the R5000 can remain in the account, and the interest, capital gains and dividends on it will be tax-free.
5. Who can offer them?
Treasury has outlined who will be eligible to offer tax-free savings accounts. Service providers include licenced banks, long term insurance companies, managers of registered collective investment schemes, authorised users, linked investment service providers and the National Government.
6. Are there any fees?
Treasury has said in the latest draft that products that charge performance fees will be excluded. Also the converting a pre-existing financial instruments or policies owned by an investor into a tax free investment will also be excluded.
The investment products may not have restrictions on when returns of the investments are paid or on the level of returns paid to the individual.
"In a similar obligation to those imposed on collective investment schemes (Unit Trusts), products that expose an investor to an excessive level of market risk are excluded," said Treasury.
Additionally, a service provider may not charge a fee that exceeds R300 on the withdrawal of an amount from a tax-free savings account.
7. Can I access my savings immediately?
No, you can't, but products must allow you to be able to access your savings and investment within seven business days after you request it. In the case of fixed deposits (or policies with a guaranteed return) early withdrawal penalties are allowed said Treasury.
Furthermore, Treasury said that in order to enhance competition and flexibility, individuals with tax free savings accounts will be permitted to transfer any portion of the value in that account to another service provider, and service providers must be able to facilitate the transfer.
8. Who is eligible?
Treasury hasn't outlined who is eligible for the tax-free saving accounts, but Sinenhlahla Nzama, senior actuarial specialist at Old Mutual believes that all South African individuals will be able to get one.
9. Who can I contact at Government for comment?
Any comments should be submitted to Janice Stoddart, email:janice.stoddart@treasury.gov.za and are due by the close of business on Wednesday 3 December 2014.
10. Can I open an account for my children?
Yes, we expect parents to be able to open tax-free investments for their children. However the accumulated savings will belong to the child, Nzama.