TFAs: what you need to know

Tax Free Investments were introduced from March 1 2015 as an incentive to encourage household savings, according to the South African Revenue Service (SARS).

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 government, a mutual bank and a co-operative bank.

SARS notes that the following regulations apply to tax-free investments:

You don’t have to pay income tax, dividends tax or capital gains tax on the returns from these investments.

You can only contribute a maximum of R33,000 per tax year (annual limit). Any portion of unused annual limit is forfeited (not carried forward to the new tax year). Example: taxpayer X invests R27,000 in year one. The unused portion of R6,000 is not rolled over to year two. In year two, the taxpayer can only invest R33,000 as per annual limits.

There is a lifetime limit of R500,000 per person.

If a person exceeds the limits, there is a penalty of 40% of the excess amount. Example: taxpayer X invests R35,000 — exceeded the annual limit by R2,000, 40% of R2,000 = R800 must be paid to SARS. This penalty is added to the normal tax payable on assessment.

A person can have more than one tax-free investment; however, you are limited to the annual limits per tax year. This means you can invest, for example, R11,000 (Old Mutual), R11,000 (Investec) and R11,000 (Absa). The same will apply if, for example, you invest in your minor child’s name.

When returns on investment are added to the capital contributed, the balance may exceed both the annual or lifetime limit. The capitalisation of these returns within the account does not affect the annual or lifetime limit. For example, if you invest R33,000 for the year and receive a return of investment of R5,000, which you have chosen to capitalise, the total amount in the account will be R38 000. The following year, you will still be able to invest your full R33,000 for year.

However, where a person withdraws the returns and reinvests the same amount, that amount is regarded as a new contribution and impacts on both the annual and lifetime limits. Any withdrawals made cannot be replaced, be it returns or capital.

In a media statement dated March 1 2017, National Treasury announced the transfers will be effective from March 1 2018.

Parents can invest on behalf of their minor child. The minor child will use his or 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.

The following accounts qualify as a tax-free investment: fixed deposits, unit trusts (collective investment schemes), retail savings bonds, certain endowment policies issued by long-term insurers, linked investment products and exchange traded funds that are classified as collective investment schemes.