http://www.bdlive.co.za/opinion/columnists/2015/10/08/some-pain-on-the-way-for-investorsFound this very interesting reading!!
A THREE-year-old government discussion document titled Incentivising Non-Retirement Savings flags some good and some bad news to be expected in coming budget speeches.
The good news is a transition period of about two years is envisioned during which you will be allowed to bypass the R30,000 a year deposit limit on the tax free savings accounts (TFSAs) introduced this year, depending on how old you are. People 65 and older will be allowed to transfer the full lifetime allocation of R500,000 in one go, those 60-65 years old will be allowed to deposit three-quarters of the lifetime limit, 50-59-year-olds one half and 45-49-year-olds a quarter.
The bad news is this is to compensate savers for doing away with interest income exemptions of R23,800 if you are under 65 and R34,500 if you are 65 or older.
"The interest income tax exemption thresholds will be phased out during the transition period. Such phasing will take account of the needs of pensioners who are currently dependent on interest income, and will only be implemented after the consultation process has been completed," the discussion document says.
The Treasury economists who authored the document provided some history to the incumbent system of not taxing interest earned up to a certain limit and concluded: "The existing interest income exemption is not an effective instrument for encouraging savings amongst low- to moderate-income taxpayers."
The original thinking behind allowing people to earn interest up to a certain limit tax free was not to encourage saving, but to simplify tax administration. According to the Treasury, in the 2008 fiscal year not taxing interest income "cost" government about R3bn.
"In order for incentives to be cost-effective, the amount of new saving generated must be more than sufficient to offset the costs to government of revenue foregone."
A key concern of government policy makers, which is a recurring theme in the discussion document, is that the incentives should encourage "new savings" among poorer households rather than "asset shifting" by the rich.
The architects of the TFSAs studied systems implemented in three countries — Belgium, Canada and UK — before concluding the UK’s individual savings accounts (ISA) system was the best role model.
"The higher participation rates by higher-income earners appear to be less acute in the UK’s ISA model than in others. While there does seem to be some level of asset shifting in the ISA model, there is evidence of new saving that was created," the study found.
The local TFSAs are not an exact copy of ISAs. For instance, the UK encourages its citizens to invest in equities by making it a rule that only half the annual cap of £11,280 can be held in a cash account.
One of the big successes of the UK’s ISAs, which the TFSAs do seem to be replicating here, is to bring more transparency and competition to the stockbroking market. When I started this column a couple of months ago, a key gripe was the unaffordable fees charged to small investors. Besides rolling out TFSAs, more retail investor friendly products like exchange-traded-fund-only accounts have been launched by Absa Stockbrokers, something I would have started with if I had had the option a few years ago.
