Much hype has surrounded the launch of Tax Free Savings Accounts (TFSA) since the legislation was enacted on 1 March 2015. Quite simply, in keeping with National Treasury’s initiative to encourage long term saving in South Africa, the scheme allows South African individuals to invest R30,000 per year and up to R500,000 per lifetime into a Tax Free Savings Account, the benefits of which are as follows:
• No tax on dividends. Your account will earn the gross dividend which will automatically be reinvested.
• No tax on income. All interest income will be reinvested tax-free.
• No capital gains tax. You won’t be taxed when you withdraw your investment.
Only South African taxpayers, who are natural persons, can invest in the product. The TFSA can be held in the name of any individual, including minor children or grandchildren; however, note, in the case of a minor, withdrawals from the TFSA must be paid to that minor’s bank account.
Also bear in mind that opening and paying into a TFSA account, on behalf of a minor, will form part of an individual’s R100,000 annual donation exemption.
The investment is flexible, i.e. you can withdraw money at any time if needed, free of any tax or penalties. Investors must be aware, however, that once funds are withdrawn from the TFSA they cannot be replaced. This is Government’s way of incentivising long-term investment in these products.
Any contributions in excess of the legislated limits, ie R30,000 per individual per year and R500,000 per lifetime, will be subject to a 40% penalty on the amount exceeding the limit. It is the investor’s responsibility to monitor how much has been contributed to TFSAs.
A potential misconception is that TFSAs should replace savings into retirement funds (pension, provident or retirement annuity funds). Although there is no one correct answer, in most cases where investors are paying reasonable amounts of tax, contributing to retirement funds still makes sense because of the upfront tax relief on contributions to retirement funds, along with the fact that there is also no tax within retirement funds.
However, for investors who make use of their full retirement fund tax deductions or who want the access to their savings that the tax-free account provides, the tax-free account offers a much better deal than any other discretionary investment.
The benefits of paying zero tax in TFSAs will materially enhance long-term returns and there is no doubt that most investors should consider taking up this opportunity. Although the initial tax saving on R30,000 per year is small, the longer you remain invested, the bigger the tax saving and enhanced return becomes. Therefore for younger clients, children or grandchildren of older clients, this presents a fantastic opportunity.
By means of an example, let’s compare saving in a TFSA vs a normal discretionary investment.
We use the same assumptions for both scenarios, namely a monthly contribution of R2, 500 (thus
R30,000 per annum), an investment period of 200 months (the time it takes to reach the R500,000 lifetime contribution limit) and an asset allocation of 65% to equities and 35% to interest-bearing assets.
A dividend yield of 3% on the equity portion of the portfolio applies while interest accrues at 7% per annum.
As far as the discretionary investment is concerned, interest is taxed at the individual’s marginal rate and dividend withholding tax of 15% applies. At the end of the investment period capital gains tax is levied.
In comparison all proceeds on the Tax-Free Savings Account are 100% tax-free.
The outcome of the above scenario highlights the difference between the performance of a discretionary investor (with an assumed 40% marginal tax rate) and a tax-free savings account investor where both investors cash out their savings after a specified period.
| Period of withdrawal | Margin of outperformance of tax-free savings account relative to the discretionary investment |
| 36 months | 3% |
| 60 months | 4% |
| 84 months | 6% |
| 120 months | 9% |
| 200 months | 14% |
The tax benefit of the tax-free savings account really becomes significant over a period of 15 to 20 years plus. Investors who stay invested over the long term and resist the urge to cash out the funds will reap the rewards of taking advantage of this opportunity.
Personal Trust has launched its own unit trust tax-free savings solution effective 1 May 2015.
Why invest in the Personal Trust TFSA?
All investors in the Personal Trust Tax-Free Savings Account will have access to professional financial planning advice to assess their risk profile and to determine the suitability of this product to their individual needs. All tax-free savings contributions will be invested in the Personal Trust Managed Fund. The Personal Trust Managed Fund is a low cost, single manager fund that invests in a combination of local and foreign equities, property trusts, bonds and cash. It is designed to seek above-average returns (inflation+6%) with a medium to high risk profile.
Investors can enjoy all the benefits of a professionally managed unit trust coupled with tax-free growth.
Why the Personal Trust Managed Fund?
We believe as an investor, you will derive the greatest benefit from the TFSA if used as a long-term savings vehicle. The compounding of ongoing savings and high inflation-beating returns will provide the most meaningful economic results over the long term.
The Personal Trust Managed Fund was launched in 2007 and enjoyed inflation-beating returns over both three and five year periods. The Fund was recently nominated as a finalist in its category in the 2015 Morningstar Fund Awards.
Being a regulation 28, higher equity fund, we believe it to be the most appropriate fund in our fund range for a long-term investment of this nature.
Our Trust Officers are able to advise you as to the suitability of this investment based on your risk appetite and financial objectives.
If you are an existing Personal Trust client, please contact your Trust Officer directly. New clients can email info@ptrust.co.za to find out more.
This investment is a tax-free product in terms of section 12T(8) of the Income Tax Act, 1962.
Personal Trust Management Company (Pty) Limited is a registered collective investment scheme manager in terms of the Collective Investment Scheme Control Act, 45 of 2002.