Reap the maximum benefits from a tax-free account by making sure you understand the ‘Ts and Cs’ involved

South africans are not renowned savers. This is something the government has acknowledged when they introduced the tax-free savings product for all banks to offer to their customers, in an effort to encourage savings.

South Africa saw an increase in the saving patterns of its people, however, the lack of understang around the Ts and Cs have led to customers making expensive mistakes, says Standard Bank. Since the introduction of tax-free savings accounts, the amount that can be invested has risen to R 33 000 a year. Investors can now save up to R 500 000 during their lifetimes without having to pay tax on the interest. This is a great opportunity, but it is a tax-break that should be fully understood before an account is opened, says Takumi Daling (Savings and Investments Manager at Standard Bank).

There is no doubt that everyone should take advantage of opportunities to maximise their income. However, what many people are not aware of is that there are several conditions attached to the offering. “Failure to adhere to these could result in SARS knocking at your door and asking for a 40% penalty on the over contributed amount- something that will take away the joy of seeing your money growing

The most important things to consider are:

• That the annual limit that applies to the tax-free interest offer is R 33 000.

Nothing stops you from opening more than one account. However, once the total in these accounts rises above the permitted R 33 000, then tax becomes payable on the over contribution.

• Because the annual limit is set at R 33 000, opening more than one account and spreading them across institutions will result in the interest on one account being allowed, and SARS demanding 40% of any over contribution beyond that stipulated limit. 

• You can only invest R 33 000 a year to qualify for the tax-free interest.

Although the lifetime investment limit is R 500 000, you cannot make a substantial lump sum investment in the account expecting that as long as the money remains in the account, the interest can accumulate and not be taxed. Again, any over contribution on a sum exceeding R 33 000 a year will be taxed at 40%.

• Realising that withdrawals from the account also has consequences.

It is natural that a financial emergency could lead to a saver withdrawing money from the account, and replacing it later. What must be considered is that this action could lead to extra contributions over the R33 000 yearly limit being taxed. 

For example:

You have R 33 000 in the account; R 10 000 is withdrawn for a family emergency. The balance is then R 23 000. However, according to SARS the R 10 000 withdrawal remains part of the original investment. Putting R 10 000 back in the account, therefore, means that you have exceeded the limit by R 10 000 ( R 43 000) and you will pay tax on theover contributed amount of R10 000.

• Tax-free transfers can be made between a savings account and into a similar account at another.

InterBank transfers have been allowed since March 2018, but it is essential that all procedures are followed and that the correct documentation is used, otherwise you may be liable to pay tax on the funds as they would have lost their tax-free status

• minor children can benefit from a tax-free savings account.

A parent or guardian can open an account in a minor’s name and contribute R 33 000 a year. However, once the lifetime limit of R 500 000 is reached, the child will not be able to make further contributions to a tax-free account. This would apply regardless of whether the entire amount was withdrawn from the account  to pay for studies or other purchases.

For example:

If a parent began investing  R 33 000 a year( and assuming this limit did not change) on the birth of a child and did so every year, the lifetime limited would be reached before the child reached the age of 16. The child would then never be able to open a tax-free account.

This may seem unfair, however the child would have access to the large sum of funds to for varsity or whatever they want to venture into “When the government introduced this tax concession, it did so in the hope that  South Africans would begin to take long-term savings seriously.  It was this intention that led them to apply the penalty structure to the tax-free savings account.”

“People starting to save, or looking to increase their existing savings, should approach opening a tax-free  account to build long-term savings.   You may not have the R 2 750 a month to take advantage of the full R 33 000 limit, but any contributions will have future benefits,” says Ms Daling.