The information below was extracted from the draft explanatory memorandum on the Taxation Laws Amendment Bill, 2014, published on 17 July 2014.
Tax free savings accounts are proposed from 1 March 2015 as a measure to encourage household/individual savings. Individuals will be allowed to open multiple tax free savings accounts, however, they may only contribute up to a maximum of R30 000 into these accounts within any given year. A lifetime contribution limit of R500 000 will apply.
The returns accruing to these accounts will not be subject to income or dividends tax. Amounts within the tax free savings accounts may be withdrawn at any time. Where an individual contributes in excess of the prevailing annual or lifetime contribution limit in any year, a “penalty” (additional income tax) of 40 per cent on the amount of excess contribution will be levied by SARS on the individual.
The South African tax system incentivises non-retirement savings through a limited exemption of interest income from taxable income. This feature has been in the tax system since before 1980, initially operating as a lever to ease the administrative burden of processing small amounts of interest income. Since 2000, tax free interest income thresholds have been actively used as a tax measure to incentivise non-retirement savings, frequently being adjusted upward on an inflation related basis.
Reasons for change
Household savings have been declining steadily in South Africa since the early 1980’s and continue to be low by international standards. The interest exemption has not been a highly visible feature of the tax system, limiting its effectiveness as an incentive. Moreover, the tax free interest exemption is limited only to interest bearing instruments.
Given the expenditure incurred in offering incentives to the public, government must consistently assess the effectiveness of such policies in achieving the intended objectives and adjust these incentives if more effective options are available. Product design features may be more useful when trying to encourage households to save, however these features are absent in the current interest exemption environment and could only be created with the implementation of an alternative non-retirement savings tax incentive.
In the 2014 Budget Review, the Minister announced the implementation of tax free savings accounts as an incentive to encourage household savings. The proposal will be enacted by creating a definition of ‘tax free investments’ in section 12T of the Income Tax Act. It is envisaged that service providers will offer tax free savings accounts that would solely comprise of products that qualify as ‘tax free investments’. A contribution into a tax free savings account is thus equivalent to an investment in a ‘tax free investment’.
Individuals may open multiple tax free savings accounts that may each invest in different ‘tax free investments’, however they may only contribute up to a maximum of R30 000 into these investments within a tax year. The R30 000 annual contribution limit applies to the contributions across all their tax free investments. A lifetime contribution limit of R500 000 will also apply. The returns accruing to these investments will be exempt from income and dividends tax. Amounts within the tax free investments may be withdrawn at any time, however if these amounts are returned to the tax free investments, those amounts will subject to the annual contribution limit.
Transfers between tax free investments at different service providers will not count towards the annual contribution limit.
The design features of the tax free investments have been included to overcome behavioural limitations leading to poor financial decisions. The proposed incentive is also applicable to a wider range of asset classes than is the case with the current tax free interest income thresholds. The envisaged eligible products will include exposure to money market instruments, equities and property investments.
The institutions that will be permitted to provide these investments to taxpayers are JSE authorised users, banks, long term insurers, collective investment scheme companies, linked investment services providers and national government. The products that institutions will be permitted to invest in will be determined in accordance with a set of characteristics that will be included in regulations governing the conduct of these investments.
Where a taxpayer contributes in excess of the prevailing annual and lifetime contribution limit in any year, a penalty of 40 per cent on the amount of the excess contribution will be levied by SARS on the individual. The reporting requirements of service providers will be specified through the Business Requirement Specifications that will be issued by SARS.
Where a taxpayer dies while having one or more tax free investments in their name, these investments will be added to the estate of the taxpayer for purposes of levying of estate duty.
While the investments are held within the estate, the returns from these investments will continue to be exempt from income and dividends tax. However, the amounts within the tax free investments cannot be transferred to their beneficiary’s tax free investments. Any transfer of tax free investments from one individual (or his estate) to another will be deemed to be a contribution and subject to the annual and lifetime contribution limits of the recipient.
In determining the aggregate capital gain or capital loss of a person, any capital gain or capital loss in respect of the disposal of tax free investments must not be taken into account.
It is proposed that the existing tax free interest income thresholds available in section 10(1)(i) of the Income Tax Act will not be removed from the system. However, they will be retained at current nominal levels, to be eroded in value by inflation over time.
The proposed amendments will come into operation on 1 March 2015 and applies in respect of amounts contributed in respect of tax free investments on or after that date.