Giving people the power to save
One of the challenges that South Africa currently faces is that society generally has a very limited concept of a savings culture. In fact, industry commentators have gone as far as to say that a culture of savings in South Africa is non-existent.
In an effort to change this, government has announced a series of initiatives which will encourage non-retirement savings. The concept of tax free savings accounts was first proposed by National Treasury (Treasury) in the 2012 Budget Review as part of the non-retirement savings reform.
The road to savings
Accounting firm BDO points out that the amendments to the Income Tax Act will allow individuals to save up to R30 000 per annum, tax free. It appears that this concession will also apply to minor children. In the 2013 Budget speech, the Minister of Finance, once again, proposed the introduction of a tax free savings account.
The idea was that individuals could invest up to R30 000 per annum into the account, with an overall lifetime ceiling of R500 000. Returns generated in the account would be tax free, whether by way of income or capital gains. The individual could withdraw the amount invested at any stage on a tax free basis.
This proposal has eventually found concrete form by way of a proposed section 12T to be inserted into the Income Tax Act. The proposal is contained in the Draft Taxation Laws Amendment Bill of 2014.
Challenges in the system
Costs within the industry are one of the major reasons why the public finds it hard to save money in these vehicles. David Warneke, Partner: Income and VAT Technical at BDO, points out indications from National Treasury, at a feedback meeting on the Draft Bill, are that the intention is to engage with issuers of such investments so as to limit exit charges that will apply upon withdrawal.
“If an individual invests R30 000 in a given year, and withdraws say R10 000, he or she will still be regarded as having invested the full R30 000 for that year. They may not re-invest the R10 000 as part of the R30 000 limit for that year. This is part of the intention of National Treasury in enacting the concession, to encourage individuals not to withdraw amounts invested,” says Warneke.
As currently drafted, extremely stiff penalties apply if an individual exceeds the R30 000 per annum or R500 000 lifetime contributions limits. A penalty by way of additional tax payable in the amount of 40 per cent of the excess applies.
Empowering society
An interesting angle is that as currently drafted, individuals may take out such savings accounts regardless of their age. Therefore, it is possible for minor children to contribute in their own names.
“So a family of four, including two minor children, may contribute a total of R120 000 a year up to a lifetime limit of R2 million. However, care would have to be taken to ensure that each contributor does not exceed his or her limit, which is calculated on an individual basis. As currently drafted, it may be argued that income or a capital gain received by a child as a result of a donation by the parent would be tax free despite the attribution of the income or capital gain to the parent who donated the investment funds to the child,” says Warneke.
Public joy
Non retirement savings reforms, together with the reform on the retirement system, which are already underway, represent National Treasury’s efforts to encourage household savings with the broader benefits of reducing excessive debt and reliance on the state.
Other initiatives which encourage a culture of savings include National Savings Month, which is held in July, and Financial Planning Week, which is held in the last week in August. Advisers can take advantage of South Africa’s growing middle class, which is eager to work towards a culture of savings.
