What are the rules of the tax free savings account?

In the budget speech last year, the minister of finance announced that new legislation would be passed that would allow the introduction of tax free savings account "to encourage household saving."
 
With the introduction of the tax free savings account less than a month away, here are the rules and regulations that have already been released, to help you understand a little bit more about what the tax free savings accounts are.
 
Annual and lifetime limits
 
The Department of National Treasury has said that an individual's contribution to a tax free savings account will be limited to R30 000 a year, and a total lifetime contribution of R500 000. Once you have reached this limit you simply leave the account to earn you interest.
 
All interest, and capital gains made on the account are tax free. If you saved R2500 a year, it would take you 16 years to reach your lifetime limit.
 
You will be allowed to have a total of two accounts, but the joint sum of the account cannot exceed R30 000 per year or R500 000 in lifetime contributions. These accounts can either have interest or equity products, or a combination of both interest and equity products.
 
What can be included?
 
According to treasury, the tax free savings accounts will allow for already existing savings and investment products to be included. This means that when the new tax free savings accounts are implemented on 1 March 2015, there should already be a variety of products available.
 
These products include:

• Interest bearing accounts and collective investment schemes,
• Exchange traded funds,
• Direct share purchases, and
• Insurance products

 
The treasury highlights that all of the products that fall within the category of the tax free savings accounts should be simple to understand and transparent, ensuring that customers know exactly what they are investing in, and how the account will function.
 
Taxes and penalties
 
All of the funds within the tax free savings account are exempt from tax, but only if you abide by the laws of the tax free savings account.
 
According to the Old Mutual website you do not pay dividend tax, income tax or capital gains tax. However, if you go over the annual deposit limit or exceed your lifetime contribution limit, you will be taxed because you have breached the terms of the savings account.
 
You have two options if you exceed either of these limits:
 

• 1.You can withdraw the excess from the account, as well as the interest that this extra money earned, general tax terms will apply to the additional amount, as well as to the interest that this amount has earned.
• 2.Or you can pay tax on the excess amount and the interest that it earns, while keeping it in the savings account. Senior legal advisor at Nedgroup Investments Denver Keswell explained in an article that people will be charged 40% tax on any amount exceeding either the R30 000 a year contribution limit or the R500 000 lifetime contribution limit.

 
Withdrawing money from the account
 
You will not have immediate access to the funds in your savings account, however, the bank or financial institution that you have the account with will have to give you access to your funds within seven days of a request.
 
However, according to the National Treasury, withdrawals of any accumulated savings cannot be replaced, and any contributions that you make, even if the funds are a part of the amount you originally took out of the savings, will be subject to the annual and lifetime limits (as discussed above).
 
This means that if you remove money from the account, you cannot replace that sum of money, and therefore your yearly contribution will be less than R30 000.
 
Who can offer tax free savings accounts?
 
A list of the service providers has not yet been released, but the institutions that are eligible for offering tax free savings accounts includes:
 

• Licenced banks,
• Long term insurance companies,
• Managers of registered collective investment schemes,
• Authorised users,
• Linked investment service providers, and
• The National Government will be able to offer tax free savings accounts

 
Old Mutual explains that any products that includes a performance fee will not be able to qualify as a tax free savings account. Other products that will be excluded from the tax exemption are those that open up the investment to "an excessive level of market risk."
 
If you investment in a tax free savings account, you (as well as the institution that you are investing with) will be required to provide the information pertaining to your account to the South African Revenues Service (SARS).
 
SARS will be responsible for ensuring that people making use of the tax free savings accounts do not exceed their annual or lifetime limits.
 
For more information on the tax free savings account, click here.
 
For a comparison between the pros and cons of a tax free savings account versus a retirement annuity, click here.