National Treasury plans to publish regulations under the Income Tax Act that outline which savings products will qualify for inclusion in the tax-free savings accounts that are to be introduced from March next year.
The regulations, which will provide “a more definitive separation between qualifying and non-qualifying products”, are expected to be released before the end of October, Treasury told Parliament’s Standing Committee on Finance this week.
Cecil Morden, the chief director of economic tax analysis at the Treasury, says the Financial Services Board will regulate these products and providers.
Providers will be able to offer the likes of a bank fixed deposit, a retail savings bond or a unit trust fund within the savings accounts. The tax-free accounts give you an opportunity to save, up to certain limits, in these products without paying any tax on the interest income, dividends or capital gains. They are intended to take over from the current tax exemptions on interest income, which will no longer be increased and will therefore gradually be eroded by inflation.
Morden told the finance committee that Treasury rejected comments on the relevant amendments to the Income Tax Act that the annual amounts you can contribute to these accounts (R30 000) and the lifetime limit (R500 000) are too low.
In its responses to the comments it received on the Tax Laws Amendment Bill, Treasury says these levels provide a “reasonable incentive to encourage middle-income earners to save”. The amounts will be increased regularly in line with inflation, it said.
However, Morden did say that a higher annual contribution for taxpayers over the age of 65 could be considered in future – although not for next year – given that people aged 65 and over have a shorter time-span over which to move their savings into the tax-free accounts.
Treasury also dismissed comments that the penalty for contributing more than the limits was too harsh, saying it had been chosen for its simplicity. The bill provides for a penalty of 40 percent of any amounts you contribute to the tax-free savings account that exceed the annual limit.
Treasury’s response document also clarifies that you will be able to reinvest amounts you withdraw from a tax-free savings account, but within the annual limits.
* Treasury confirmed to Personal Finance that the changes to the tax deductibility of income protection policies will go ahead as provided for in the Income Tax Act from March 1 next year.
In terms of the amendment to the Income Tax Act that takes effect from March next year you will no longer enjoy a tax deduction for premiums paid on income protection policies that pay you a regular income if you are disabled. However, if you are disabled and successfully claim, any payments made from these policies after March next year will be tax free.
Currently, income policy premiums are tax deductible but payments from these policies after a claim are mostly taxed.