Look to the national budget and make Tax-free Investments or Savings Accounts a part of your financial planning
With just hours to go before this year’s national budget speech, we can advise that all South Africans need to begin saving, no matter what the Finance Minister presents. All that’s needed is personal determination to develop a savings discipline. Add the opportunities offered by a tax-free investment account (TFIA), also known as a tax-free savings account (TFSA), and the results could be very rewarding.
According to Errol Meyer, Head of Advisory Financial Consulting at Standard Bank, the Treasury has come to the aid of South Africans who see taxes and inflation eroding the value of their non-retirement savings by offering an additional option. Tax-free accounts can be used for long-term goals, but most ideally for short-term goals, such as future holidays and education. They are valuable additions to retirement annuities, which cater for long-term savings, and South Africans should consider them as part of their personal financial planning efforts.
Presently, tax-free accounts offer an opportunity to save up to R30 000 a year tax free, with a lifetime limit of R500 000 per person – though this could change with the budget announcements. The key to the success of tax-free accounts is that they are flexible: you can begin saving with as little as R150 – R250 a month, and various financial institutions structure their TFIA accounts to offer investments in a wide variety of asset classes from equities, unit trusts and bonds to listed property funds and cash.
Even though the financial year for taxpayers is approaching rapidly, any investment made before 28 February will qualify for tax-free status. The advantages offered by tax-free accounts include:
No tax on interest earned
The accounts offer a tax-free haven for deposits from other accounts that would attract tax
Withdrawals are tax-free to the lifetime limit of R500 000
Money may be withdrawn at any time and moved from one tax-free account to another
Significant opportunities for young South Africans to save
An investment alternative for parents who can pay the R30 000 annual limit into an account for a child.
As with most savings, the longer cash stays in the account, the quicker it grows. The objective should be to not make withdrawals from these accounts for between three and five years to let benefits grow. Where possible, the amount deposited each year should be adjusted subject to the limits to take care of inflation, so returns are not lessened by changing financial circumstances.
Whether the Minister announces a rise in the deposit maximum for tax free accounts this year or not, this is an opportunity to save for the future that should not be ignored by any South Africans, young or old, no matter the tax bracket they fall in.
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For most of us, the key take-away of each year’s budget speech is how much more or less tax we will be paying, not necessarily how and why. But with Budget 2017 taking place on Wednesday this week, Standard Bank has put together an explainer that comprehensively breaks down what the average consumer could expect:
Bracket creep to disproportionately affect middle-income earners
Last year’s Medium-Term Budget stipulated tax increases to ensure that government revenue would rise by R28 billion for the 2017/18 tax year, and R15 billion in 2018/19. However, the recent rally in commodity prices and our forecast that GDP growth may accelerate to 1.4% this year, will buy South Africa more time before a VAT increase is required.
VAT hike has a disproportionate effect on low-income earners
A VAT hike means a rise in living costs for all consumers, but the effect is felt more strongly by lower-income households. Household expenditure data from the BMR (Bureau of Marketing Research) shows that households earning below R89 000 per annum spend between 36% and 42% of their income on groceries.
PIT weighs more on middle-income earners
GDP growth over the next three years is expected to remain below potential, thus unlikely to create new employment to broaden the tax base. This means growth in Personal Income Tax (PIT) revenue can only be achieved by higher taxes and/or bracket creep.
Bracket creep will affect the middle-income consumer disproportionately (those earning between R89 000 to R707 000 a year), because this segment’s majority (85%) relies more on salaries and wages as a primary source of income. In addition, this segment includes civil servant professions. Given that government is currently scaling down on its wage bill, the purchasing power of this group is at risk. Furthermore, debt levels are higher among the middle segments than for low and affluent earners.
CIT tax to benefit from higher commodity prices
Due to the economic slowdown and fall in commodity prices, the contribution of Corporate Income Tax (CIT) to total tax revenue decreased. An increase in the CIT rate is seen as potentially counterproductive, since South Africa has reached the threshold above which additional increases may have a negative effect on revenue collected. However, the recent commodity price rally has boosted earnings of major tax-contributing corporates in the mining sector, recently resulting in better-than-expected CIT collections.
We expect current commodity prices to remain near current levels in 2017, having a positive effect on CIT revenue in the 2017/18 and 2018/19 fiscal years.
Income gap narrowing
BMR data shows government’s fiscal policy has made progress in reducing income inequality. Currently, over 17 million South Africans receive social grants, with 24% of households relying on grants as their main source of income. We estimate that the ratio of average income in the lowest income group to average income in the highest income group declined by about 43%.
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In a first for South Africa, Standard Bank Group has partnered with GE to provide a ‘Health Accelerator’ programme that provides technical, clinical and business acumen to South African healthcare professionals who want to improve and grow their existing practices, or even transition into private practice. Announced in November 2016, the programme’s first participants begin their training this month.
Over the next six months, the first participants will undertake a professional development journey in which they will learn from leading experts in enterprise development, healthcare management and innovation, human resources, marketing, business ethics, and governance. The modules – a total of 24 – will be delivered weekly in a classroom environment at the GE Africa Innovation Centre in Houghton and at the Standard Bank Incubator in Rosebank. Additional resources will be provided through e-learning platforms and masterclasses.
The programme is part of GE’s Enterprise and Supplier Development Accelerator in Africa. It was activated by Londvolota, GE South Africa’s BBBEE partner, which is focused on building entrepreneurial capability within Black-Owned companies in the country. Similarly, the Standard Bank Incubator supports entrepreneurs through skills development, support and mentorship, and provides access to industry experts.
According to Standard Bank Joint-CEO Sim Tshabalala, both Standard Bank and GE recognise the value of small businesses as drivers of job creation and economic growth; both companies hold enterprise development, skills development and innovation as core business objectives; and both are strongly committed to supporting more inclusive growth and economic transformation in South Africa.
The aforementioned common values surely form a strong part of the reason for this long-term alliance; in 2014, we collaborated to improve access to affordable power infrastructure. That collaboration has since expanded into new sectors, including a partnership between Standard Bank Kenya and General Electric Healthcare East Africa to finance, install and manage diagnostic equipment in Kenya’s public hospitals.
Referring to the almost three-years of successful association, Mr Tshabalala reveals that it has enabled us to pool our different areas of expertise to support our shared objectives through the launch of the Healthcare Accelerator.
Head of the Standard Bank Incubator Jayshree Naidoo, says that our goal in partnering with GE is to work jointly towards growing the community of healthcare professionals across the continent. This will be done by ensuring the success of the professionals that are selected for the Accelerator programmes.
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