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  • Tax Free Investments: What South Africans Need

Tax Free Investments: What South Africans Need

22 March 2017

By: Jordan Gosling, Tax Consultant, BDO Tax Services

If you are looking to increase your earnings, why not do it without paying tax? Tax free investments as an initiative were implemented with effect from 1 March 2015. This incentive was introduced in an effort to increase the average household savings within South Africa.

So, how does it work? The taxpayer can invest money, with the aid of a service provider, into any of the following accounts:

  • Fixed deposits
  • Unit trusts
  • Retail savings bonds
  • Certain endowment policies issued by long-term insurers
  • Linked investment products
  • Exchange traded funds (ETFs) that are classified as collective investment schemes.

The return that is earned as interest or dividends from these accounts will not be subject to any tax.

What’s the catch?

There is no catch, only limits. In his 2017 Budget Speech, the Minister of Finance proposed that the yearly limit that a taxpayer can invest be increased from R30 000 to R33 000, as of 1 March 2017. The lifetime limit remains unchanged at R500 000. These limits refer only to the amount you invest and not the amount of returns that you earn.

Should you go over the limits stated above, a penalty will be applicable at a rate of 40% of the excess amount that you invest. By way of example, should you invest R40 000 (R7 000 over the limit) in one year, you will be penalised R2 800 (R7 000 x 40%).

Investing in a Tax Free Investment over the long run could be an attractive option. Projections given by Investec show that with a savings account with an annual return of 11%, over 40 years, a taxpayer’s initial R500 000 would be worth R15 500 000 .

This initiative is an important mechanism that South Africans should consider. It is important however to seek professional advice regarding one’s investment choices. We recommend that you consult your

Financial advisor, or speak to one at BDO Wealth Advisers, who will assist in considering your personal circumstances and advise you accordingly.

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