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A tax free investment account for your child?

28 September 2016 PPS Investments
Tandisizwe Mahlutshana, Executive of Marketing at PPS Investments

Tandisizwe Mahlutshana, Executive of Marketing at PPS Investments

Since tax free investments accounts were introduced in South Africa there has been huge interest in the offering because of the significant tax benefits offered to investors. In fact some parents or legal guardians are also opting to invest in a TFIA on behalf of a minor child, and use it as a springboard to create wealth for their children or grandchildren over the long term.

As you may be aware, a TFIA is a long-term savings vehicle with significant tax benefits. You may contribute up to a maximum of R30 000 per tax year and R500 000 over your lifetime without paying tax on dividends, on interest income, on withdrawals or on switches. The tax benefits will allow the investment to grow tax free, and all proceeds will be tax free in the hands of the investor. 

While this could be a great addition to your portfolio and can have noteworthy benefits for both you and your family, before you invest in a TFIA for your children there are a few things to remember. 

Investing in your child’s name does not impact your limits, but it will impact theirs.

By having a TFIA in a child’s name, their annual or lifetime limits will be used. In other words, all contributions into this account will form part of their R30 000 a year and R500 000 lifetime cap. If you invest the maximum allowable amount per year in your child’s name, your child would reach their lifetime cap after 16.7 years. 

Withdrawals cannot be replenished

Refraining from unnecessary withdrawals is important because, later in their lifetimes, your children will not be able to replenish amounts that you have withdrawn, and these amounts still impact your child’s maximum contribution limits. But that’s not the only reason to refrain from unnecessary withdrawals. 

By keeping all the funds invested, you give your child a better chance of uninterrupted investment growth. Assuming you invest the maximum allowable amount per year with a return of more than 12% per year on the TFIA (with no withdrawals), the investment could be worth more than three times the capital contribution when your child reaches their lifetime cap in 16.7 years. 

Be wary not to exceed contribution limits

You may contribute up to R30 000 per year (R2 500 per month) and R500 000 in total into a TFIA. It is important not to breach these limits as SARS imposes a 40% penalty on over-contributed amounts. For example, if you invest R35 000 it means you have exceeded your child’s annual limit by R5 000. The penalty, which is R2 000 in this case (i.e. 40% of R5 000), must be paid to SARS. It would have been far more beneficial to have invested the extra R5 000 in an investment account instead! 

If you invest for multiple children, you may be liable for donations tax

You may donate up to R100 000 a year to a natural person free of donations tax, so this would cover a R30 000 contribution to a child’s TFIA. However, if you invest for multiple children on their behalf and exceed this R100 000 donations tax cap, this would result in you exceeding your donations tax limit and may be subject to donations tax. A flat rate of 20% donations tax is imposed by SARS when exceeding the threshold. 

Their investment will belong to them

There is no minimum age requirement to invest and since your child may not yet have the capacity to make investment decisions, you are able to make the decision to invest on their behalf. However, even if you are the contributor, you may not transfer the funds into an account other than one held in the name of the minor, or that is part of their deceased estate. 

It always helps to make informed decisions and to make sure that if you do intend to invest in a TFIA you are fully aware of the implications and how to make optimal use of this powerful tool for your children’s future.

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