The new tax free investments regime
BENEFITS TO YOU AND YOUR CHILDREN
In an effort to encourage savings by ordinary South African households, the Minister of Finance has introduced the new concept of a “tax free investment” which comes into effect on 1 March 2015. In effect, investments administered by a regulated financial institution and authorised as a “tax free investment” by the Minister will benefit from these news laws. The tax benefits are:
Every natural person may contribute up to R 30 000 per annum (R 2 500 per month) to a tax free investment
Over the course of the lifetime of that natural person a maximum of R 500 000 can be contributed
All interest, dividends, capital gains and any other form of income accruing from the tax free investment are entirely free from income tax
Any withdrawals from a tax free investment are made tax free. However any withdrawal does not impact on future contributions to your tax free investment –i.e you can never contribute more than R 500 000 in a lifetime
Tax free investments and your minor children
This incentive is available to all “natural persons”, which means that you could contribute amounts on behalf of your minor children as well. Ordinarily, all income accruing to minor children as a result of a donation by that child’s parent would be taxable in the hands of the parent. However, because the income accruing to the child is exempt, it would appear that the exemption passes onto the parent. This becomes a very tax efficient way to give your children a little “leg-up”. Think about this – you start today contributing R 2 500 per month to a tax free investment in the name of your teenage child. The income and growth within the investment attracts no tax at all. Let’s say in eight years time he/she has their first job and is ready to move out of the home and stand on his/her own two feet. You also no longer want to contribute as you are now saving for your own future. Your child now has an investment worth approximately R 360 000 (assuming returns of +- 10% per annum) to:
Use as a deposit for his/her first apartment, or
To continue to contribute to, out of his or her own income. Remember, he/she does not have to contribute R 2 500 per month. They can contribute whatever amount they can afford, up to a maximum of R 2 500 per month. Surely a great start to their personal financial planning initiatives!
You can do the same for each of your children. However you may not donate more than R 100 000 per annum in total to your children – any amount in excess of this amount will attract donations tax.
Obviously, investments made in your own name bring similar benefits and should form an integral part of your personal retirement planning savings.