What is it?
Tax Free Investments were introduced as an incentive to encourage household savings. This incentive is available from 1 March 2015.
How will it work?
The tax free investments may only be provided by a licenced bank, long-term insurers, a manager of registered collective schemes (with certain exceptions), the National Government, a mutual bank a co-operative bank, the South African Postbank, and administrative financial services provider and a person authorised by a licensed exchange to perform one or more securities services in terms of the exchange rules. Service providers must be designated by the Minister in the Gazette. As per the current Regulation, only the above are designated.
- You don’t have to pay income tax, dividends tax or capital gains tax on the returns from these investments.
- a person is limited to an annual limit as well as a lifetime.
|Year of assessment||Annual limits|
- Note that any portion of unused annual limit is forfeited (that is, it is not carried forward to the subsequent year of assessment).
- Example 1:
- 2020 Year of Assessment
- Annual limit is R33 000
- Taxpayer X invested R27 000.
- The unused portion of R6000 is NOT roll-over to the subsequent year of assessment
- Example 2:
2021 Year of Assessment
- Annual limit is R36 000
- Where the taxpayer invested R40 000
- There will be a penalty of 40% on the excess amount above R36 000
- Therefore, R40 000 less R36 000 = R4 000 x 40% = R1 600 penalty will be payable to SARS.
- This penalty is added to the normal tax payable on the notice of assessment.
- Any person (including minor children) can have more than one tax free investment, however, the annual limitation is an aggregation per every year of assessment. For example you can invest R11 000 (Old Mutual), R11 000 (Investec) and R14 000 (Absa).
- There is also a life time limit of R500 000 per person.
|Year of assessment||Invested|
|2030||20 000 *Note 1|
|*Note 1: Limited to the Life time limit of R500 000|||
- Note that when returns on investment are added to the capital contributed, the balance may exceed both the annual and/or lifetime limit. The capitalisation of these returns within the account does not affect the annual or lifetime limit.
- Example: if a person invested R36 000 for the 2021 year of assessment and the return on investment is interest of R5 000, which is capitalised, the total amount in the account will be R41 000. The interest amount of R5000 is not regarded as a contribution.
- This must be compared to where a person withdraws the return on investment (as per above example R5000) and invests that amount in the same tax free investment account, that amount is a new contribution and impacts on both the annual and lifetime limits. The same principle will apply if any portion of the capital is withdrawn and reinvested in the same tax free investment account.
- Transfers between tax free investments accounts are effective from 1 March 2018. Parents can invest on behalf of their minor child. The minor child will use his/her own annual or lifetime limits.
- Tax free investment accounts cannot be used as transactional accounts.
- Debit or stop orders and ATM transactions will not be possible from these accounts.
Examples of accounts that will qualify as TFI
- Fixed deposits
- Unit trusts (collective investment schemes)
- Certain endowment policies issued by long-term insurers
- Linked investment products
- Exchange traded funds (ETFs) that are classified as collective investment schemes.
What must I do next?
Enquire from a service provider about investing in a tax free investment.
Service providers will provide SARS, twice a year, with the following info:
- Total contributions per tax year;
- Total amounts withdrawn per tax year;
- Total amounts transferred per tax year;
- Total returns on investment for example: interest, dividends, capital losses and capital gains.
The service providers will provide these taxpayers with this information by issuing an IT3(s) Tax Free Investment certificate annually.