Tax implications: widening the investment space

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By John Kennedy

The launch of tax-free savings accounts (TFSAs) will allow investors to invest discretionary money without paying any tax on dividends, interest or realised capital gains. The eligible products may include exposure to various asset classes, including money market, fixed income, equity and property investments or any combination thereof. The National Treasury’s vision is that these accounts will form the basis of every South African investor’s portfolio.

Currently, individual South African taxpayers pay tax on dividends at a flat rate of 15%, irrespective of their other income. Interest earned above the annual exemption of R23 800 (R34 500 for taxpayers over 65 years of age) and 33% of realised capital gains above R30 000 is included in income and taxed at the scales applicable to individuals. As the R23 800/R34 500 exemption was limited only to interest-bearing instruments, the proposed new product widens the tax-free investment space to include more options, for example equity funds, by not only allowing for tax-free interest but also for dividends and realised capital gains.

Contributions to TFSAs will be limited to R30 000 per investor per annum and a R500 000 cumulative lifetime limit will apply. These limits will be reviewed in future and may periodically be adjusted for the effects of inflation. The R30 000 annual limit will work on a “use it or lose it” principle and there will not be any roll-over for unused portions of prior years. This is to encourage investors to start saving earlier and save regularly over the long term.

Although the R30 000 annual limit may seem a little low to some investors, who may consequently contemplate if it will be worth the effort to invest, the amounts will quickly add up. For example, even at the current annual limits a family of four can have investments of R600 000 plus all growth thereon outside the tax net in just five years.

Former Minister of Finance Pravin Gordhan did not propose an increase in the interest exemption in the 2014 National Budget. It is National Treasury’s intent to keep this exemption at current levels of R23 800/R34 500. The objective is for the annual R30 000 contributions to make up for the interest exemption diminishing in real terms and give investors time to gradually adjust their investment portfolios to the new tax regime.

 • Kennedy is Citadel director: wealth planning and regional head: Western Cape