Investors could soon be enjoying the benefits of saving tax-free if the National Treasury gets its way. Last week Treasury issued two consultation papers on promoting household savings.
“National Treasury started on the journey of proposing other tax friendly non-retirement savings vehicles at the February 2012 budget speech, when the interest exemption was not increased as usual,” said Sore Cloete senior legal manager at Old Mutual.
She added: “Currently the only real tax friendly non-retirement savings vehicles are interest bearing investments (of which bank deposits are one example); as the interest in these vehicles are exempt from tax up to certain limits. The interest exemption is currently at R22 800 (for tax payers younger than 65) and R33 000 (for tax payers older than 65). Unfortunately these vehicles are not usually used to save for retirement as these vehicles do not usually keep up with inflation. It has now been proposed that two types of accounts/savings vehicles will receive tax benefits, being: interest bearing accounts and equity accounts.”
Incentivising non-retirement savings
This paper sets out proposals for non-retirement savings product, which is supported by tax incentives. Treasury said the aim of the product is to support voluntary (discretionary) savings by households and complement retirement savings.
The paper proposes:
• Tax free returns, growth and withdrawals;
• Limiting contributions to R30, 000 per year and R500, 000 over the lifetime of an individual.
• Expanding on the current tax free interest income regime by replacing it with products that will offer more investment options.
Improving tax incentives for retirement savings
Treasury said this paper sets to simplify the current tax regime by harmonising the tax treatment of contributions to retirement funds.
It proposes that:
• Contributions by employers to retirement funds remain tax deductible for taxable employers;
• Employer contributions be taxed as a fringe benefit in the hands of the employee;
• Employee contribution, for tax purposes, be deemed to be made up of both the employee and the employer contributions, and the total contribution be capped at R250 000 or 22.5% of taxable income for taxpayers 44 years and younger. A cap of R300 000 or 27.5% of taxable income will apply to those aged 45 years and above.
Cloete highlighted several benefits of these tax free savings vehicles. “The introduction of more “tax friendly” savings vehicles, up to certain capped amounts, can be welcomed by all investors as the growth in these vehicles, whether interest or capital will not have tax implications. Investors may thus receive a possible higher payout.
"Although aimed at the lower and middle income earners, higher income earners may also be interested in such vehicles as the return on such investments will not have tax implications. Unlike additional retirement savings vehicles (like retirement annuities), investors will not be restricted to access funds in these investments and should an emergency occur these investments could be accessed without any tax implications. This could also be seen as a benefit to investors,” she said.
According to reports, the new savings accounts could be in place by 2014 after the proposals have been discussed and legislation has been drafted and passed.
The closing date for comments on these two papers is 30 November 2012.