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The purpose of the new tax free investment products is to encourage individuals to increase their household savings.
Any amount (interest or dividends) received or accrued to a natural person from a qualifying tax free investment, will be exempt from normal tax and dividends tax. In addition, should you ever decide to dispose of your tax free investment, any realised capital gains or losses will be disregarded for tax purposes.
However, there are a few things to take note of before you decide to invest in a tax free investment:
- Your annual contribution is limited to R30 000 per year for all your tax free investments;
- Your contribution has to be in cash;
- The total aggregate contributions that you are allowed to make to all your tax free investments in your life time is limited to R500 000;
- Should your annual contributions exceed the R30 000 limit, you would be liable for additional tax (penalty) of 40% of the excess contributed in that year; and
- Should the aggregate contributions exceed the R500 000 limit, you would be liable for additional tax (penalty) of 40% of the excess contributed that has not previously been taken into account.
It should be noted that if you re-invest your returns from the tax free investment, the re-investments would not form part of the above mentioned limitation of R30 000 and R500 000. As individuals are allowed to open multiple tax free investment accounts, any transfers between tax free investment accounts will not count towards the annual contribution limitation. However, should you decide to withdraw funds from a tax free investment and later return the funds to the same tax free investment, the reinvestment will count towards your annual limitation.
The current annual interest exemption, R23 800 for individuals younger than 65 years and R34 500 for individuals 65 years or older, is still available for individual taxpayers to utilise against interest income received or accrued from other investments that do not qualify as a tax free investment. This annual exemption will remain at the current levels, meaning that its value will be diminished over time.
This legislation becomes effective on 1 March 2015, and we encourage you to contact your financial advisor to consider if this product is appropriate for you.
Engela Crocker
Tax Manager, Johannesburg
