What are Tax-Free Investments?
As from 1 March 2015, South Africans can invest in Tax-free Investments. The purpose of this incentive is to encourage savings and reduce household indebtedness.
How do Tax-Free Investments work?
- Returns from Tax-free Investments are exempt from income and dividend tax.
- No Capital Gains Tax (CGT) will be payable on the disposal of these investments.
- R 36 000 per person per year.
- R 500 000 per person in their lifetime.
When a person’s contributions exceed the above limits, a penalty of 40% on the amount of the excess contribution will be levied by SARS on the individual.
The balance of your tax-free investment can exceed R 500 000 overtime due to earnings and capital gains. It is only your CONTRIBUTIONS that are limited to R 500 000.
This limit does not reset when you make withdrawals.
Let’s say you have made contributions over the last 10 years totaling R 300 000.
You can still invest R 36 000 per year and you have R 200 000 left of your lifetime contribution limit.
Let’s say you decide to make a withdrawal of R 100 000.
You will still only have R 200 000 left of your lifetime limit.
Benefits of Tax-Free Investments
- Tax-free investments are 100% liquid. Investors can withdraw their money at any time.
- If you choose to invest through a Unit Trust, you have a wide variety of funds to choose from.
- Each fund is managed by a team of experts.
- Savings on tax enhance the effect of compounding interest over time.
Who should invest in Tax-Free Investments?
We recommend investors consider Tax-Free Investments as a long-term investment.
The reason for this is twofold:
- The benefit of Tax-free returns enhances the effect of compounding wealth. This means that not only will your investment grow exponentially over time, but this factor will be increased by the tax benefit of the Tax-Free Investment.
- To capitalize on this compounding effect, you would want as much money in this investment as possible. This is why we recommend that you keep this money invested for the long term and don’t use it for short-term goals.
Tax-Free Investments are very popular with our clients with young children. They use these vehicles to save for the Tertiary Education of their children. These parents can also decide to start the tax-free investment in their Children’s names. The investment will then be allocated to the child’s lifetime contribution limit and not the contributing parent’s.
How do you start a Tax-Free Investment?
The following accounts qualify as a Tax-Free Investment:
- Fixed deposits
- Unit trusts (collective investment schemes)
- Retail savings bonds
- Certain endowment policies issued by long-term insurers
- Linked investment products
- Exchange-traded funds (ETFs) are classified as collective investment schemes.
Investors who aim to achieve capital growth over the long term tend to prefer Unit Trusts.
Unit Trust provides them with a wide range of funds (local & global) that offer better potential returns than Tax-Free Savings Accounts at Banks.
What is your next move?
We have created a unique Tax-Free Investment Portfolio for our clients who aim to achieve long-term growth.
The portfolio’s performance (below) has outperformed the JSE All Share Index over the long term:
Reach out and start your journey to financial wellness.
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