Scroll Top

Tax-Free Investments

I am often approached by people looking to make their first investment who ask me what is their best option?

 

While everyone’s circumstances and requirements are different, my response is usually a tax-free investment (TFI).

Who can invest?

All individuals with a South African ID number may invest in a TFI and as there are no age limits, they can be taken out for newborn babies or by people in retirement. Only natural persons or their insolvent or deceased estates can invest in TFIs. Companies, close corporations and trusts are excluded.

Where can you get a TFI

TFIs can only be offered by banks, long term insurers, managers of collective investment schemes, mutual banks, co-ops and the government of South Africa. As a result, an investor will not be able to invest directly in shares as a TFI alternative or in any investment not offered by the prescribed service providers.

Tax-Free?

As described by its name, you pay no South African tax on this investment. This generally makes it your preferred investment choice as the TFI returns are naturally higher than similar investments where the returns are subject to either income tax (interest), dividends tax,  capital gains tax etc.

 

Contribution limits

You can invest up to R36 000 every year tax-free and R500 000 in total over your lifetime. These limits can change over time.

 

You can add additional amounts and make regular contributions – these are voluntary so you can decide to change your contributions at any time.

Where an investor exceeds the contribution limit in any tax year, an amount equal to 40% of that excess amount is deemed to be an amount of normal tax payable in respect of that year of assessment.

To avoid this, should you have a TFI with Momentum they will link another investment to your TFI that will receive any contributionin excess of the allowed maximum investment amounts.

 

Withdrawals

You can keep your money invested for as long as you want.

You can withdraw money at any time, but any additional investments will not first offset this withdrawal and it will count towards your annual and lifetime investment limits i.e. you can deposit a maximum of R500 000 irrespective of any withdrawals.

In terms of the regulations, a TFI with a maturity date must make payment to the investor within 32 days, and where there is no maturity date, within 7 days after the request for payment is made by the investor.

 

Death and Creditors

When you die, your savings will be distributed to your nominated beneficiaries.

Your money is safe from creditors under specific circumstances.

 

Transacting capabilities

A TFI cannot be used as an account against which debit orders or stop-orders may be debited, from which credit or debit card payments are made and it may also not be accessible at any automatic teller or similar device.

Other restrictions
  • No existing investment or account may be converted to a TFI.
  • A TFI may not provide any risk benefits. It is a pure investment vehicle.
  • Where an endowment policy is used as a TFI, it will not be subject to the normal restrictions applicable to endowment policies, i.e. the term restriction, the limitation on premium increases, etc

 

Investment Options

You are able to invest the funds in your TFI in a wide range of options.,

However, no more than 10% of the total value of the TFI may come from shares in a single company or from one commodity and not less than 80% of any shares must be listed on a recognised.

Where any part of the value of a TFI is determined directly or indirectly with reference to any commodity, not more than 10 per cent of the value of that TFI may be derived from that commodity.

Where any part of the value of a TFI is determined directly or indirectly with reference to any financial instrument issued by any company and that financial instrument is not a share not more than 10 per cent of the value of that tax free investment may be derived from those financial instruments.

Where part of a TFI is invested in financial instruments issued by any public entity, municipality or foreign government which has been assigned a foreign currency sovereign rating lower than that of South Africa, no more that 30% of the total value of that TFI may come from those financial instruments.

Note that the above restrictions do not apply to collective investment schemes (unit trusts).

Momentum offers a wide range of qualifying investment options offering varying degrees of risk and return and are able to accommodate all personal risk profiles