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Tax Free Savings Accounts: Everything You Need to Know

As a nation, South Africa does rather poorly on the savings front. With the majority living near or below the breadline, there’s not much to save when you’re more concerned with just getting through the month. Our high levels of consumer-debt, combined with little in the way of personal savings, means we become financial burdens on the government in the long-run. It’s for this reason that tax free savings accounts were introduced in March 2015 as an incentive to encourage household savings.

Since then, financial houses have created quite a buzz around these savings accounts, promoting them through radio, television and online advertising as an accessible savings mechanism. And since they offer a ‘tax break’, this year you’ll see them referenced on your annual tax return (ITR12). So let's have a closer look at these accounts and what they mean to you, as a taxpayer.

What is a Tax Free Savings Account?

Basically it’s a type of savings account offered by financial institutions that invests your money in a combination of financial products such as unit trusts, bank savings accounts, fixed deposits, bonds, etc.

The difference between this and other savings or investment accounts is that all returns, i.e. the interest, dividends or capital gains earned, will be tax free in your hands. This means that you’re not liable to pay tax on the growth of your investment, nor if you decide to withdraw from your account.

Are There Limits to Tax Free Savings Accounts?

  • Annual and lifetime contribution amounts
    There’s an annual contribution limit of R36 000 per tax year, as well as a lifetime limit of R500 000. Once you have reached your lifetime contribution limit of R500 000 no further investment in a tax free savings account will be allowed.
  • No limit of number of accounts
    The annual limitation can be spread across as many savings accounts as you wish, provided you don’t invest more than R36 000 in total for the tax year (1 March to end February). So if, for example, you’ve already contributed R10 000 to one tax free savings account for the period, you’ll only be able to invest a maximum of R26 000 to any others.
  • No carry over of annual contribution limit
    The annual limitation can’t be carried over to the next tax year. If you contribute less than the limit in a tax year, you simply forfeit any unused amount and are given a new annual limit of R36 000 to invest in a tax free savings account the following year. For example, if you’ve invested R26 000 for the tax year, you can’t carry the R10 000 over to the next year.
  • Contribution to a tax free savings account for a minor
    As a parent, you’re able to open a tax free savings account for your child(ren), but you need to be aware that any contributions you make to this account on their behalf counts towards their annual and lifetime contribution limit.

What are the Benefits of a Tax Free Savings Account?

  • Tax free growth, even if you reinvest
    The critical advantage of a tax free savings account is that your growth or earnings on the initial investment are exempt from tax on withdrawal. You’re able to reinvest (or capitalise) your returns and they don’t count towards your annual or lifetime contribution limit.

    For example, if you invest R36 000 for the year and receive a return of investment of R2 000 that you re-invest, the total amount in the account will be R38 000, yet you’ll still be able to invest your full R36 000 the following year as the R2 000 reinvestment doesn’t count towards the annual or lifetime limit.
  • Unlimited withdrawals, with conditions
    You’re free to withdraw from your tax savings account at any time you wish, however any replacement investment amount is treated as a new contribution and will therefore count towards your annual and lifetime limits.

    Let’s pretend you withdraw an amount of R36 000 from your tax free savings account because you’re going through a short-term cashflow issue. A few months later, in the same tax year, you come into a little money and so you deposit R36 000 back into your tax free savings account. Provided you haven’t made any other contributions for the year, this amount takes you to your contribution limit for the year, plus it'll be added your overall lifetime contribution. If you’d already made a contribution in the tax year, this payment would have pushed you over your annual contribution level.

What Happens if I Exceed the Contribution Limit?

If you exceed your annual or lifetime limit, SARS imposes a stiff 40% penalty on the excess contributed. This will be payable on assessment in the year you exceeded the limit.

For example, if in one tax year, you invest R20 000 in an account with one institution and R20 000 in an account with another, you will have contributed R4 000 more than the annual limit of R36 000. The penalty will therefore be 40% of the excess contribution (R4 000 X 40%), giving you a R1 600 tax penalty to pay.

How Do I Report on My Tax Free Savings Account on My Tax Return (ITR12)?

The financial institution holding your tax free savings account will issue you with a tax certificate called an IT3(s), which contains all the details you need for your tax return, e.g. contributions, interest, dividends, etc.  The institution also sends this information to SARS, who pre-populates it onto your ITR12 in the section called Tax Free Investments. This is where you should see the information from your tax certificate. You must check that the pre-populated information in your tax return agrees to the information on you tax certificate.

Alternatively you can use TaxTim to help you complete and file your tax return and we will import your tax free certificate directly from SARS eFiling.  You won't need to worry about filling in any fields,  because TaxTim does it all for you, based on your answers to his simple questions! 

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