Tax penalty if you put too much in new savings accounts

rp_896054983.jpgAuthor: Laura du Preez

You will be penalised if your contributions to government’s proposed tax-free savings accounts are higher than the annual or lifetime limits. National Treasury plans to introduce the products on March 1, 2015.

The 2014 Taxation Laws Amendment Bill proposes amending the Income Tax Act to allow you to save up to R30 000 a year – or up to R500 000 over your lifetime – in approved savings products – such as a bank fixed deposit, a retail savings bond or a unit trust fund – without paying any tax on the interest income, dividends or capital gains earned by your investment, as long as it remains in the account. This is in line with what was proposed in the 2012 Budget.

But the draft bill, which was released this week, includes a new provision for a penalty of 40 percent of the amount you contribute that exceeds R30 000 a year and R500 000 over your lifetime.

The explanatory memorandum to the bill says you will be allowed to open multiple tax-free savings accounts, but the penalty has been introduced to prevent you from contributing more than the annual and lifetime limits across a number of accounts at different financial institutions.

The growth and earnings on your investments in the tax-free savings accounts are not subject to the annual or lifetime limits – the limit applies only to the amounts you invest.

The memorandum to the bill says financial services companies that offer tax-free savings accounts will be required to report the investments you make in the accounts to the South African Revenue Service (SARS). SARS will monitor whether you have exceeded the annual or lifetime contribution limits.

If, for example, if you contribute R20 000 to one account and R15 000 to another account in one tax year, you will have contributed R5 000 more than the R30 000 annual limit, and you will have to pay a once-off penalty of 40 percent of the R5 000. The excess contribution of R5 000 can remain in the account thereafter, and the interest, dividends and capital gains on it will be tax-free.

Chris Axelson, the director of personal tax and savings at National Treasury, says that, in a discussion document, Treasury proposed that one option for dealing with excess contributions to the savings accounts was to require the financial services companies that offer the accounts to move any funds that exceed the contribution limits into other savings products and to determine the tax the investor would have paid if he or she had not contributed more than the limits.

The financial services industry is of the view that adopting such a practice would be too much of an administrative burden, he says, and the penalty is regarded as the simplest alternative.

The penalty should be imposed only rarely, because banks or unit trust companies should stop you from contributing too much to a single tax-free savings account, Axelson says. Contributions in excess of the annual or lifetime limits will occur only if you invest in the tax-free savings accounts of more than one financial institution, he says.

The penalty is intended to be a simple solution to deter you from intentionally contributing more than you should to the tax-free savings accounts.

A financial institution is unable to check if you have already contributed to a savings account at another institution, because this would require a system that records contributions in real time, which could infringe on your right to confidentiality, Axelson says.

Treasury has calculated that it will be worth your while to pay the once-off penalty of 40 percent in order to benefit from the tax-free interest, dividends and capital gains earned by your investment only if your savings in the account have been earning a relatively high return for a very long period, Axelson says.

If your contributions to a tax-free savings account do exceed the limits, SARS will calculate the penalty at the end of the tax year, he says.

If SARS determines that you must pay a penalty, but you do not submit a tax return, because, for example, you earn less than R250 000 from a single source and do not receive any other income, SARS will send you a return to submit, Axelson says.

Withdrawals and transfers

In line with the original proposals for the tax-free savings account, the draft bill provides that you can withdraw any amount from the account at any time, but any further contributions will continue to count towards the annual and lifetime limits.

The explanatory memorandum says if you transfer your savings from one tax-free savings account to another account at, for example, a different financial institution, the transferred amount will not count towards the contribution limits.

When, in 2012, the former minister of finance, Pravin Gordhan, announced the plan to introduce the accounts, he also said that the tax exemptions on interest income would be pegged and not increased each year to account for inflation. As a result, the exemptions are being eroded by inflation. The exemption is currently R23 800 for taxpayers under 65 and R34 500 for those aged 65 and over.

The tax exemptions apply only to interest-earning investments, and such investments may not be appropriate for your savings needs. The tax-free accounts will offer tax exemptions on returns from a wider range of asset classes.

Products that may be included

The explanatory memorandum to the draft bill says National Treasury envisages that the products that will be eligible for inclusion in the tax-free savings accounts will offer exposure to money market instruments, equities and property investments.

The institutions that will be permitted to provide these investments will be stockbrokers (authorised users) registered with the Johannesburg Stock Exchange, banks, long-term insurers, collective investment scheme companies, linked-investment services providers and the national government, the memorandum says.

A Treasury discussion document released in March said that stockbrokers will be able to offer you a tax-incentivised account exclusively for exchange traded funds (ETFs) and not accounts in which you can trade individual shares.

The document also said exchange traded notes and ETFs that are not registered as collective investment schemes, such as gold ETFs, will not be recommended for inclusion in the accounts.

It also said that disclosures about the products and their costs will have to conform to certain requirements.The bill released this week provides for the promulgation of regulations to govern how these investments can operate.

Axelson says the regulations will probably be drafted and released later this year.

In its March discussion document, Treasury proposed excluding from the tax-free savings accounts any contractual products where high penalties are imposed if you do not stay invested, or fail to contribute, for the contracted term.

The document said Treasury would engage the industry to decide on a reasonable exit charge when you want to withdraw from an investment before the term ends or if you breach the contract.

* Comment on the draft legislation must be submitted by Sunday, August 17, to Nombasa Nkumanda at or Adele Collins at