You could earn tax-free interest and capital growth on your savings in both interest-bearing investments and equities if National Treasury’s proposals for a new tax-incentivised savings product are adopted.
National Treasury this week released a document entitled “Incentivising non-retirement savings” in which it proposes that two types of tax-incentivised savings accounts are introduced, while the existing tax exemptions on interest income are phased out.
Currently, if you are under the age of 65, you can invest in an interest-bearing account and earn up to R22 800 tax-free each year. If you are over 65, you can earn tax-free interest of R33 000 each year.
National Treasury is proposing that these exemptions are phased out and that, instead, banks and investment houses will be able to offer you two types of tax-incentivised savings accounts:
* One that invests in bank deposits, retail savings bonds and interest-bearing collective investment schemes or unit trusts; and
* One for collective investment schemes that invest in shares or directly in property.
National Treasury says the new savings accounts could be in place by 2014, after the proposals have been discussed and legislation has been drafted and passed.
You will contribute to either of these accounts with money on which you have already been taxed, and you will not be able to claim a tax deduction on your contributions. However, all the earnings – interest and dividends – as well as any capital growth, will be exempt from tax.
But Treasury does propose limiting the amount you can contribute to one or both of these accounts. You will be entitled to contribute up to R30 000 each tax year and R500 000 over your lifetime. These contribution limits will be adjusted over time to take account of inflation.
You will be entitled to withdraw your savings at any time, but your contribution cap will not be re-calculated to take account of the amount you withdraw.
For example, if you save R150 000 and later withdraw R50 000 of what you contributed, you can contribute only another R350 000 before reaching the R500 000 limit. National Treasury says the aim of this restriction is to discourage you from “making casual withdrawals driven by problems of self-control”.
However, you will be able to withdraw any earnings on your savings without affecting the cap on the amount you have in the account.
If you are unable to contribute the full R30 000 in any year, you will lose the unused portion: you cannot contribute more than R30 000 the following year.
The accounts will be ring-fenced for tax purposes and registered with the South African Revenue Service.
National Treasury proposes that the savings accounts will be regulated to ensure:
* You are treated fairly;
* The costs levied on the accounts are reasonable; and
* You receive appropriate information on costs, what access you will have to your money, the risks your investment faces and the returns you are likely to be paid.
The document proposes that criteria will be developed for the fair treatment of investors in the accounts, and product providers that agree to abide by these criteria will be able to market their savings accounts as compliant.
You will be able to switch your savings between the companies that offer these accounts.
Treasury also proposes regulating the advertising of the new savings accounts to prevent you from being encouraged to switch accounts when it is not in your best interests to do so.
The rationale behind the new savings accounts is that you should be encouraged to save to reduce your vulnerability to financial shocks and your reliance on debt.
If we all save more, government will be less reliant on volatile capital inflows, and a higher savings rate will help to fund investment, which is a prerequisite for higher economic growth and job creation.
National Treasury says the current tax-free interest income thresholds are not very visible, because you have to fill in an income tax return to claim them, and they receive little publicity beyond the announcement of the amounts in the annual Budget.
The interest exemptions are generally not included in the marketing of savings products, Treasury notes.
Treasury says the interest exemptions are not well integrated with other forms of capital income and raise the question of whether investment income is being treated consistently, given capital gains tax and the introduction of withholding tax on dividends.
As of March this year, dividends paid on shares or unit trusts that invest in shares have been subject to tax at a rate of 15 percent.
HOW THE NEW SAVINGS ACCOUNTS WILL BE PHASED IN
National Treasury proposes phasing out the existing tax exemptions on interest income within two years of introducing its proposed tax-incentivised savings product. However, Treasury says it has taken account of the needs of pensioners who rely on interest income.
The exemptions will be phased out only after consultation with product providers, it says.
The proposal is that 50 percent of the current exemption will be withdrawn in the first year of the new savings accounts being introduced and the remaining 50 percent in the second year.
You will be able to contribute to the savings accounts from the first year in which the tax exemptions on interest income are withdrawn, and transitional arrangements will be introduced to accommodate older savers.
National Treasury is proposing, for example, that if you are between the ages of 45 and 49, you will be able to contribute not just R30 000 a year for the first two years after the new savings accounts are introduced, but R125 000 (a quarter of the lifetime limit of R500 000).
If you are between the ages of 50 and 59, you will be able to invest half of the lifetime limit, or R250 000, in the savings accounts in the first two years after they are introduced. People over the age of 60 will be able to invest the full R500 000 in the savings accounts during the transition period.
According to National Treasury’s analysis, the transition from the current exemptions on interest income to the new tax-incentivised savings accounts will either make no difference to the amount of tax you pay or you will pay less tax.
National Treasury’s discussion document notes that some people may be invested in interest-bearing accounts that have minimum fixed terms, and stakeholders will be consulted on possible ways to accommodate these people.
* You have until November 30 to comment on National Treasury’s proposals. Email comments to [email protected], or fax 012 315 5516, or write to Private Bag X115, Pretoria, 0001.