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by Liam Doyle

Tax-Free Investments: A Brief Overview

South Africa’s government introduced tax-free investments to the country in 2015. This was done to encourage household savings in the nation. It is now a great way to save for a various reasons, such as a child’s education, setting aside money for emergencies or undergirding your retirement savings.


Are tax-free investments really tax-free?


The short answer is a definite “Yes!” While an individual is subject to an annual limit (more on that below), you will not be liable for any income tax, rental income, dividends tax or capital gains tax on the returns of these investments.


This means that your investment growth is absolutely tax-free, which allows you to maximise your capital growth. You have control over which investment option you want to utilise, and flexibility when it comes to contributions (either as an annual lump sum or monthly payment), obviously within the limits set by legislation. On top of all this, your investment growth, even your income distributions, does not count towards your maximum limits.


This is different from investing in an approved retirement fund (such as a retirement annuity), where the contributions are tax deductible. Contributions to tax-free investments cannot be deducted when it comes to your annual income tax, but as we have seen, all of your returns on these investments are absolutely tax-free.


This is why one investment expert has described tax-free investments as the only free lunch in the complicated world of investing.


Can anyone invest in tax-free products?


All South African residents can invest in the product of their choice. Parents can invest on behalf of their children, and even minors are able to invest for themselves.


What types of products are tax-free?


Since 2015, a number of categories of investment are available that can be tax-free. They range from unit trusts to linked investment products. Retail savings bonds and fixed deposits, as well as certain endowment policies that are issued by long-term insurers, can be tax-free options. If an exchange traded fund is classified as a collective investment scheme, it could also be a tax-free investment product.


You mentioned something about limits…?


Yes, there is a limit to how much you can invest in tax-free products in a single tax year. This was increased from R33000 to R36000 in 2021. There is also a lifetime cap of R500 thousand, which has remained the same.


You can invest in any number of tax-free products you want. For example, in one year, you could invest R10000 in a unit trust, R10000 in a fixed deposit and R14000 in a tax-free endowment policy, while investing another R2000 in a qualifying exchange traded fund. This would all add up to give you an annual tax-free total of R36000.


However, if the amount invested in the year exceeds that limit, there is a penalty of 40% on the amount exceeding the limit, payable to SARS. For example, if you invest R5000 more than the cap, you will need to pay SARS R2000 in taxes (R5000 x 40%).


If you invest less than the limit each year there are no penalties, but you cannot carry over the tax benefit to the next year. At the current maximum amount allowed per year, you have just over thirteen and a half years of tax-free benefits as outlined above, before reaching the current lifetime limit. Depending on any changes that might be made to the annual limits or lifetime cap in the future, this period of time could be extended or shortened.


How do withdrawals work? Could I transfer accounts between providers?


One of the features that make tax-free investments attractive is their accessibility. Sporadic withdrawals are allowed on these investments at any time, and there are no penalties for making them. This allows a much greater flexibility than a retirement annuity, for example, where you can only withdraw from your accumulated savings from the age of 55. Even if you are looking to supplement your retirement savings with a tax-free investment, they are not subject to retirement investment restrictions.


Regular withdrawals can’t be set up though, since they would undo the whole reason for having savings accounts in the fist place. It would be a very good idea to consult an expert before making any decisions on withdrawals, as they can also discuss the long-term impact of making them on your savings strategy.  They can also advise you on the advantages that retirement saving plans do offer, so that you can invest in the best products for your long-term and short-term needs.


Withdrawals from tax-free products do not affect the annual limits for your maximum investment limits. For example, if you withdraw R6000 after investing R36000, you have still invested as much as you can for the year; you can’t invest another R6000 until the following tax year.


Since March 2018, it has been possible to transfer tax-free investments between providers. You are able to transfer the full value or a portion of your investment.


Tax-free investments for minors


In the case where parents have invested in tax-free products on their children’s behalf, the contributions will count towards the child’s lifetime limit of half a million rand, and are subject to the same annual restrictions and limits. Withdrawals can only be made to an account that is held in the child’s name. 


Where it can get tricky is that a parent’s contributions towards their kid’s tax-free investment account are considered as a donation and could then be subject to donations tax. At this stage, SARS exempts the first hundred thousand rand that an individual donates from this tax. (The donor is responsible for the donations tax, not the receiver of the donation, unless applicable tax is not paid on time; in that case, both the donor and receiver become equally liable for the payable tax on the donation.)


Can I transfer my tax-free investments to someone else?


These products are not transferable between persons. This means that in the event of your death, they would need to be liquidated and form part of your estate and will be subject to estate duty. They can then be paid to the beneficiaries you nominated, or distributed according to the stipulations you made in your will.


Morebo and tax-free investing


As you can see, while there are a lot of benefits to investing this way, there are also a number of factors to consider and a lot of options when it comes to tax-free investing. It is a great way to see your money grow with great savings, but navigating the way to the best returns can be pretty daunting and quite complex. Depending on what you want to achieve, there might be other options that are more suitable before considering tax-free investments, while for other goals tax-free investments would be the ideal choice.


This is why Morebo exists: to help our clients choose the best products for their particular needs. Whether you’re looking to save for your kids’ education, want to supplement your retirement or are just looking at setting aside some money in case of a rainy day, we will be able to set you up with the best product for your needs.


Be in touch today to have one of our expert consultants discuss which tax-free options would best suit you to meet your goals and aspirations.


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Morebo Wealth (Pty) Ltd, an affiliate of Liberty, the Liberty Group Ltd is an authorised Financial Services Provider in terms of the FAIS Act (no. 2409)
Morebo Brokerage (Pty) Ltd is an Authorised Financial Services Provider in terms of the FAIS Act (no. 48360)

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