Johannesburg – The beginning of this month marked a new tax year in South Africa.
Many South Africans still hold long-term savings in standard, taxable accounts. This could be because they are not aware of the benefits of a tax-free savings account (TFSA).
In 2015, National Treasury introduced tax-free savings accounts to reignite a savings culture among South Africans.
Financial services group Sanlam takes a look at tax savings offered by TFSAs. Are the tax benefits worth opening a new account?
The benefit may be small during the first few years, but as the value of the investment grows, it becomes significant. Let’s take an investor in a 100%equity fund as an example:
An aggressively risk-profiled investor chooses a 100% equity fund for her TFSA.
Staying within SARS’ contribution limits, she invests R36 000 per tax year for the first 13 years and R32 000 in the 14th year.
Because the product is part of her long-term financial plan, she leaves the money in the account for another six years. At the end of 20 years, assuming 4% in dividends every year and 6% in capital growth, her TFSA will be worth R1 954 757 compared to R1 752 256 had she left it in a standard, taxable account where 20% dividends withholding tax was subtracted every year by the administrator.
That is a cumulative tax saving of more than R200 000 over 20 years.
But that’s not where the benefit ends. Should she then withdraw the money after 20 years, no capital gains tax is payable.
In the standard, taxable account – assuming she is in the 45% tax bracket – she would have owed SARS R139 804 in capital gains tax, leaving her with only R1 612 452 in her pocket. In total, after 20 years, an equity investor’s decision to invest the same amount of money in a TFSA instead of a standard, taxable account has saved her R342 305.
Irvin Tsimane, Liberty’s Inland Strategic Markets senior manager, said any windfall should be saved or used to service debt.
“Everyone’s situation is unique, so it is best to consult with an expert, a financial adviser, or a broker. They will help you to take advantage of investing in tax-free savings accounts as well as in retirement annuities, as they are also tax-deductible,” said Tsimane.
Tax-free investors pay no income, dividend or capital gains tax on their investment returns, which boosts future capital value.
The current thresholds for TFSAs are as follows:
• A maximum of R36 000 per annum.
• A maximum of R500 000 per lifetime.
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