Good news on the the tax-free front as the annual limit is raised

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Nonhlanhla Kunene | 23 February, 2017

Tax-free investors woke up smiling this morning after Finance Minister Pravin Gordhan gave them a welcome surprise in his 2017/18 budget announced yesterday.

The annual limit for tax-free savings was increased 10% to R33,000, from R30,000 previously.

This was unexpected – earlier this year Treasury indicated to Savetaxfree.co.za that there would be no significant changes to the tax-free regime in this budget. However, the move is in line with Treasury’s statement in the 2014 budget – when TFSAs were introduced – that the limit would be increased in line with inflation.

There was more good news for SA’s low to middle income earners – buyers of homes in the affordable housing market will now be exempt from paying transfer duty for properties costing up to R900,000.

However, stock market investors have been hit by a 15% to 20% increase in dividend withholding tax – making TFSAs even a more attractive proposition.

The dividends tax was raised largely as a result of the introduction of a new personal tax bracket of 45% for individuals earning over R1.5m. The higher dividends tax will help prevent business owners, for example, from simply lowering their salaries and increasing their shareholdings, and replacing their salaries with dividends.

Seugnet de Villiers, Investment Analyst at Nedgroup Investments, believes the 10% increase in the TFSA limit will provide further incentive for South Africans to take advantage of the savings opportunities available via tax-free investments.

“While the growth on tax-free contributions over the past two years has been very encouraging, we found that there are still many investors who believe that the contribution limits of R30,000 per year and R500,000 per lifetime do not make it worth their while. These new limits will almost certainly have an immediate impact on the uptake of these investments and we applaud the move by government.”

De Villiers feels tax-free investments have taken off as the “no-brainer” investment of choice in South Africa, with more than 260,000 new tax-free investments being opened in the first tax year alone according to the 2016 Intellidex Survey, which sought to get an overall sense of the status of tax-free saving accounts, one year since they were introduced.

She says the total contributions to tax-free investments at Nedgroup Investments had already more than doubled by January in the second tax year – not including the flows for February which is always one of the most popular months for tax-free investing.

De Villiers believes that all South Africans stand to gain by considering tax-free investments and says they’re looking forward to seeing the impact of the increased limits with the start of the new tax year on 1 March.

She highlighted the following benefits that make the investments a no brainer:

• Zero percent tax – the growth on your tax-free investment portfolio is boosted throughout your investment time frame by being exposed to zero percent tax on dividends earned (instead of 20%).
• Zero percent tax on interest/income earned, instead of your marginal tax rate on interest earned above the annual interest exemption, which has remained unchanged for the new tax-year, and
• Zero percent tax on capital gains realised at withdrawal, instead of up to 18% on gains above R40,000).

“This is an excellent incentive to encourage a much needed savings culture in South Africa,” she says.