Tax Free Investment Accounts
Regulation prohibits the use of performance fees in tax free investment accounts. For this reason, Foord offers tax free investment accounts in the fixed fee B4 class of Foord Balanced Fund, Foord Equity Fund and Foord Flexible Fund of Funds. The fees are as follows:
|Fund||Annual Fixed Fee|
|Foord Balanced Fund Class B4||1.00% + VAT plus 1.35% in underlying foreign unit trust|
|Foord Equity Fund Class B4||1.35% + VAT|
|Foord Flexible Fund of Funds Class B4||1.35% + VAT|
MINIMUM LUMP SUM AND MONTHLY CONTRIBUTIONS
Foord’s tax free investment accounts are subject to the legislative maximum annual contribution limit of R33 000 and a minimum of R10 000. The maximum monthly debit order of R2 750 will apply to debit orders. The minimum debit order amount for all Foord unit trust investments is R1 000 per month.
WHAT ARE TAX FREE INVESTMENT ACCOUNTS?
Tax free investment accounts are operated in terms of S12T of the Income Tax Act. Investors utilising these accounts earn “tax free” income and capital gains. This means that local interest earned will be tax free, local dividends will not be subject to dividends withholding tax and gains made on disposal of tax free investments won’t attract capital gains tax. Taxes may be withheld on income earned in foreign jurisdictions. Proper use of tax free investment accounts offers investors a good way to maximise investment growth. However, investors must be aware of the applicable restrictions. Investors may be subject to significant adverse tax consequences if the restrictions are exceeded. Transfers between tax free investments offered by different service providers are not currently permitted.
WHAT ARE THE INVESTMENT RESTRICTIONS?
Contributions (meaning the amount of money paid into the tax free investment account by the investor) are limited to R33 000 per tax year. The lifetime contribution limit per investor is R500 000. Existing investments may not be converted to tax free investment accounts. The limits apply across all tax free investment accounts held by individual investors. In other words, while investors may have more than one tax free investment account, care must be taken not to exceed the overall investment limit in any tax year across all such accounts. Any contribution into a tax free investment account in excess of the annual or lifetime contribution limit is subject to taxation of 40% of such excess.
Investor Mr A contributes R15 000 into a unit trust tax free investment account in May 2017 and contributes a further R20 000 into a bank deposit tax free investment account in February 2018, bringing the total contribution to R35 000. Mr A will be subject to taxation of R800 (being 40% of R2 000) on the excess contribution (per S12T(7)(a)). Reinvestments of income, such as interest or dividend income, earned on tax free investment accounts do not count towards the annual or lifetime contribution limits. Foord is obliged to provide the South African Revenue Service (SARS) with detailed transaction information on all tax free investment accounts.
HOW SOON CAN INVESTMENTS BE WITHDRAWN?
Investors have unrestricted access to tax free unit trust investment accounts. Redemption proceeds will typically be paid within two working days. Tax free investment accounts are designed to encourage long-term savings. Replacements of contributions withdrawn do not reduce the contribution total. In other words, any withdrawal will reduce the amount that can be contributed into the tax free investment account in future. Withdrawals from tax free investment accounts therefore result in an opportunity loss to the investor that can never be recovered. Investors should give careful consideration to such an outcome before investing into tax free investment accounts.
Investor Mrs B contributes R25 000 into a tax free investment account in June 2017. Mrs B withdraws R5 000 before Christmas 2017. Mrs B invests R10 000 of her annual bonus in January 2018. The total contributions made during the tax year are R35 000 (being R25 000 plus R10 000). Mrs B will be subject to taxation of R800 (being 40% of R2 000) on the excess contribution. The withdrawal of R5 000 does not reduce the contribution total.
WHO CAN USE TAX FREE INVESTMENT ACCOUNTS?
Tax free investment accounts are available to South African resident individual investors only. They cannot be used by trusts, companies or other legal entities. Parents can open tax free investment accounts for their minor children. Each child will have his/ her own annual and lifetime contribution limit. However, should a parent withdraw from the account of a minor child, the proceeds may only be paid into a bank account opened in the name of that child.
WHAT TYPES OF INVESTMENT CAN BE USED?
Tax free investment accounts may be in the form of unit trusts, bank accounts, stock broker accounts, retail savings bonds and life insurance policies. Linked investment service providers may also provide these accounts on their platforms. Tax free investment accounts must be clearly designated as tax free. Investors should carefully consider the type of investment they select to utilise the tax incentive. Taxpayers will receive the maximum tax benefit from investments that typically have higher income yields and greater chance of capital growth. Balanced and high equity unit trust investments offer the ideal income profile.