Treasury published a discussion paper entitled “Incentivising non-retirement savings” in October last year.
The focus of the paper was on non-retirement savings and potential tax incentive options to encourage discretionary savings. South Africa’s low savings rate is a policy concern, both in terms of individual household savings and the overall national savings rate. In our previous article we discussed governments’ proposals regarding retirement reform and here we discuss their proposals around non-retirement (discretionary) savings.
Internationally, several countries have implemented similar tax-incentivised vehicles to encourage increased household savings. Some of you may be familiar with the flexible scheme that is found in the United Kingdom (UK) in the form of Individual Savings Accounts (ISAs).
The original paper (Oct 2012) proposes that South Africa expand its current tax-free interest threshold incentive by replacing it with a broader tax-incentivised savings vehicle.
This vehicle should comprise two types of accounts:
• Interest bearing accounts which may invest in bank deposits, retail saving bonds or interest- bearing Collective Investment Schemes (CISs), such as money-market funds;
• Equity accounts, which may invest in CISs that hold JSE listed equities.
Earnings and capital growth within these tax-preferred savings vehicles will be fully exempted from income tax. Contributions will be made from after-tax income, and will be capped. The proposed annual limit will be R30 000 and a lifetime limit of R500 000 per individual. These limits will be adjusted over time to take account of inflation. Consideration may also be given to appropriate transition mechanisms, including allowing taxpayers aged 45 to 49 to invest up to one quarter of their lifetime limit, 50 to 59 years to invest up to half of their lifetime limit and for those aged 60 years and older to invest the maximum of their lifetime limit during a proposed transition period.
The savings vehicles will have to be registered with the South African Revenue Service.
As part of the budget speech in February this year more clarity was given on the proposed solution from Treasury.
It is proposed that the current interest exemption threshold will be increased to R34 500 for those over the age of 65 and to R23 800 for those under the age of 65 with effect from 1 March 2013. These may not be adjusted for inflation in the future but appear now to remain in place.
It appears that the proposed incentivised savings may now be in addition to the current interest exemption. The new vehicle will function as a wrapper, exempting all investment returns from income, dividend and capital gains taxes. The new accounts will be introduced by April 2015. The contribution limits will be adjusted for inflation on a regular basis.
At Veritas we see these proposals as a positive step by Treasury. We often get asked by our clients for a recommendation for a good discretionary vehicle for saving for children/grandchildren and domestic workers. This could be an ideal vehicle for savings in these circumstances.
Author: Rick Briers-Danks
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