In terms of a Tax-Free Savings and Investment Account (TFSA), you are entitled to invest up to R33,000 per year and your contributions are capped at a lifetime limit of R500,000.
TFSA’s were launched in the March 2015 by an amendment to the Income Tax Act.
You pay no tax on any interest income or dividends earned by the investment, regardless of how long you stay invested, and you do not pay any capital gains tax (CGT) when you withdraw your investment.
It does not matter how much growth you earn on your annual contributions, as long as the amounts you put in do not add up to more than the annual or the lifetime limit. There is a penalty of 40% of the excess contributions that exceed the annual or lifetime limits. The penalty applies in the tax year in which you make the excess contribution. SARS will expect you to complete a tax return and will issue you with an assessment, and you will have to find the money to pay the tax.
Types of TFSA investments
The types of available TFSA investments are bank deposits, unit trust funds and exchange traded products (ETPs). Individual stockbroking accounts through which you can select your own shares do not qualify as tax-free accounts. TFSA investments cannot include life assurance or disability cover
Investments with performance fees are not allowed – only a flat fee may be charged.
Withdrawals from TFSA investments are allowed. This however does not alter your annual or lifetime limits utilised – the withdrawals do not reduce the amount that you are deemed to have contributed for the year and for your lifetime to date. Investments with high penalties for early withdrawals are not allowed. If the investment has no maturity date, you must be able to access your money within seven days of requesting it. If the investment has a maturity date – for example, if you invested with a bank offering a one-year fixed deposit – the investment must be payable to you within 32 days of your request to withdraw.
Compared to retirement funds
Despite the benefits of investing in a tax-free savings account, your retirement fund is still likely to provide better tax savings, because contributions to your pension fund or retirement annuity (RA) fund are tax-deductible, within certain limits. TFSA contributions should be considered once the tax-deductible retirement fund limit has been reached. Retirement fund assets are exempt from estate duty, whereas the tax-free savings account will form part of your estate for estate duty purposes. However, you can only withdraw your retirement savings when you retire or resign from an employer-sponsored fund or, if they are in an RA fund, from the age of 55, whereas your savings in a tax-free savings account are always available.
Each member of a family (including children) can invest up to R30 000 per year, meaning that parents can invest in their children’s names for the long term. (Parents need to ensure that investments on behalf their children fall within their R100,000 annual donations tax limit or else they will be liable for donations tax at 20%). The income of a minor or adolescent child is likely to be below the income tax threshold. This means that an investment in the child’s name is likely to be tax free anyway. In this case, then, there would be no additional advantage to using a TFSA. If the child withdraws the investment before he/she starts to pay tax, some of his/her lifetime limit has been wasted in a season of life during which they received no additional tax benefit out of having the money in a TFSA.