Government plans to introduce a tax-incentivised savings vehicle by April 2015, it announced in the Budget this week.
As proposed in October, the new savings vehicle, which financial institutions will be able to offer, will enable you to earn tax-free interest, dividends and capital gains on your savings in interest-bearing, unit trust and property investments.
In line with the original proposals, National Treasury’s latest document on retirement reform refers to the vehicle having a limit on contributions of R30 000 a year and R500 000 over a lifetime.
However, Treasury has changed its original proposal to phase out over two years the existing tax exemptions on interest income earned on investments after the new savings vehicle is implemented. It announced this week it is proposing that the exemptions remain in place and be increased for the 2013/14 tax year but not in future years. This will mean that the exemptions will be eroded by inflation over time.
Olano Makhubela, Treasury’s chief director of financial investments and savings, says many people who commented on the original proposals, especially the elderly, were concerned about the implications of quickly phasing out the interest exemptions, because many interest-bearing accounts have long terms to maturity.
Makhubela says allowing the new tax-incentivised vehicle to co-exist with the current tax exemptions on interest earned from investments could also encourage new savings, rather than driving savers to simply shift their existing savings.
The interest exemptions that you will be able to enjoy for the tax year that began this week have increased to R23 800 (from R22 800 in the last tax year) for individuals under the age of 65 and to R34 500 (from R33 000) for individuals over 65.
Treasury’s latest proposals are that banks and investment houses will be able to offer you tax-incentivised savings accounts that will be either interest-bearing or non-interest-bearing, and they could include the following products:
* Bank fixed deposits;
* Retail savings bonds;
* Collective investment schemes, such as unit trusts and exchange traded funds; and
* Property assets, such as real estate investment trusts and property loan stocks.
A remaining original proposal is that, in contributing to the savings account, you would use money on which you had already been taxed, so you would not be able to claim a tax deduction on your contributions. However, all your earnings from the account – interest and dividends – as well as any capital growth, would be exempt from tax.
Makhubela says it is still the intention of Treasury that you will be entitled to withdraw your savings at any time, but the limit on your contributions will not be recalculated to take account of the amount you withdraw. For example, if you saved R150 000 and later withdrew R50 000 of what you contributed, you could contribute only another R350 000 before reaching the R500 000 limit.
“We would encourage individuals to keep their money [in the account for] as long as possible,” Makhubela says.