May 2015
Benjamin Franklin once said that there were only two things certain in life: death and taxes.
At the beginning of April this year, the South African government announced a new and exciting initiative to incentivise and promote savings in the country. Since the early 1980’s SA household savings have declined steadily, and continue to rank very low by international standards. For all our hard working Harbour Wealth clients, any tax breaks or incentives are carefully taken into consideration when constructing a financial plan, as the less money that leaves your investment obviously means more capital left to grow and compound. As fastidious as we are about reducing costs for our clients in the form of fees, so too are we about efficiently structuring our clients’ investments so as to minimise the tax burden. We pay taxes all day… every day, so when we are presented with a gift, let’s not waste it!
If you invest via a tax free savings account you benefit from paying no Dividend Withholding Tax, which is a tax charge of 15% on dividends received by shareholders. You also pay no tax on interest income, including listed property income. You pay no capital gains tax. No performance fees. No initial fees and no additional fees, baring your annual advice fee agreed with your financial adviser. I know this sounds rather mechanical, so let’s paint a picture to illustrate what a massive difference this can make to your investment. Let’s assume you contribute R2500p/m, and earn a return of 8%p.a. (made up of income and capital) and you fall into the highest marginal tax rate of 41%. Your tax saving after 5 years would have been R13 607, growing to R67 825 over 10 years, R192 449 over 15 years and a whopping R429 098 over 20 years! (Source: Grindrod Asset Management)
So what are the nuts and bolts about the new TFSA (Tax Free Savings Accounts)?
- Only a natural person with a vaild South African indentity document/birth certificate may invest.
- Contributions to a TFSA are NOT tax deductions as is the case with Retirement Annuities.
- Contributions must consist of cash, not a transfer of existing units/investments.
- Contributions are limited to an annual total amount of R30 000 during any year of assessment and an overall lifetime limit of R500 000 per natural person. Obviously your investment can grow beyond these limits! Monthly debit orders can range between R500 up to a maximum of R2500p/m.
- You may have more than 1 TFSA, but the limits will apply accoss all investments.
- If you make a contribution in excess of these limits, you will be taxed at 40%! We definitely won’t allow you to make this mistake and in effect be taxed twice, considering that your investments are made with after tax money.
- Your money is accessible and can be withdrawn at any time, BUT can only be paid into the investors bank account. There are no exemptions to this rule, even for minors.
- Any amount withdrawn does not create additional contribution capacity, so you cannot pay the amount back into your investment at a later stage.
- Transfers of TFSA are currently not allowed, however Treasury is expecting this to change after 1 March 2016.
- As with other investments made on behalf of chidren/minors, any contributions paid by a parent will be a viewed as a donation, however don’t forget that we each qualify for R100 000 donations tax exemption each year.
At Harbour Wealth we have done a lot of work on selecting the optimal investment structure and blend of underlying funds, aiming to maximise your capital growth and tax savings. To this end we have constructed the Harbour Advisory Tax Free Optimiser. If you had been invested in this product for the previous 12 months you would have earned a 23.3% return TAX FREE! Although we can’t promise the same return going forwards, we can promise you that your overall costs will stay low and your returns will be tax free. The 2015/2016 TFSA tax year deadline is 29 February 2016, but tax savings for you and your children can start tomorrow!
Melissa Dyer
Senior Wealth Planner and Head of Advisory