Tax Free Investments were introduced on 1 March 2015 as an incentive to encourage households to save.
Commonly referred to as a Tax Free Saving Account(TFSA), you don’t have to pay income tax, dividends tax or capital gains tax on the returns on these types of investments. Currently, each individual is limited to contributing R36 000 per annum, up to R500 000 over their lifetime.
There are many ways to make use of a TFSA, along with some that waste its usefulness. Here are some of the best(or worst) ways to waste a TFSA account:
#1 - Invest it in an interest earning account
Unless you already have other investments earning enough interest to qualify for paying income tax, keeping your TFSA in an interest bearing account doesn't give you any tax benefit. Interest income tax exemption is R23 800 for under 65s, R34 500 for over 65s.
#2 - Use it as a goal orientated savings vehicle
Saving for a car deposit, lobola or to buy a house? If what you are saving for has an expiry date, a TFSA is not the best place to put your money. Any money you withdraw cannot be replaced without impacting your annual and lifetime limits, so ideally, you want to keep the activity to a minimum. Plus, it is unlikely to give you much tax relief anyway
#3 - Invest it in foreign equity
You will always be liable to pay tax on foreign investments. It is a South African account, and the countries where the investment is based don't really care about what exemptions your country offers. Not their business. There may be some relief as a result of tax treaties but the benefits aren't much to write home about
#4 - Invest in 'total return' investments
These investments still pay tax on the underlying assets.
#5 - Avoid Capital Gains Tax(CGT)
Yes, you're making money, but your CGT can be managed just as well in a discretionary investment account. You have an annual CGT exemption of R40 000 to play around with anyway
There you have it, 5 ways to waste a TFSA facility
Do you have other ways to waste a TFSA facility? Leave your comment below
Is an S&P 500 EFT tracker a foreign investment? eg the SatrixMSCI, or is that ok to have in a TFSA? Could you give examples of ETFs that fall into point 3 and point 4 pls?