During the last budget speech, the Minister of Finance introduced tax free savings accounts (TFSA) as a new incentive to accumulating wealth.
South African residents are allowed to save up to R30 000 per year, or R500 000 per lifetime, into a tax free account. Through this account, you can invest in a range of savings and growth funds. Any interest, dividends and capital gains are free of tax, and the funds are free to grow beyond the R500 000 without penalty. There is however a 40% tax penalty for anyone who saves more than the permitted maximums.
The real value of the TFSA is the benefit derived from growth assets, such as shares and property, rather than money market investments. It is most beneficial as a long term saving mechanism, as any withdrawals (which are freely permitted) cannot be replaced by new savings once the annual or lifetime limits are reached. It is therefore not useful for short term savings, like holidays or a new car, for which a normal taxable savings instrument is more appropriate.
It is important to note that a pension fund or retirement annuity is still more tax efficient than a TFSA. Contributions to these retirement funds are from pre-taxincome, whereas the TFSA contribution is from after tax income. Retirement assets are also free of estate duty.