South Africa’s tax-free savings accounts (TFSA) offer an easy way for investors to save significant amounts on capital gains taxes (CGT) compared to a traditional investment portfolio.

South Africa launched tax-free savings accounts in 2015 as an investment vehicle to incentivise people to increase their savings and lower household debt. However, many South Africans haven’t taken advantage of this incentive due to their lack of understanding of these products.

Deloitte’s South African Investment Management Outlook 2023 revealed the Shocking state of South Africa’s savings rate, which is one of the lowest in the world at a dismal 0.5%.

The US has a rate of 12.4%, the Eurozone 11%, and South Korea 13.7%. South Africa is even well behind its emerging market peers, Brazil and India, which have savings rates of 16.9% and 10.8%, respectively.

South Africa’s Gini coefficient is traditionally to blame for the low savings rate. However, according to Deloitte, a significant contributing factor is the lack of understanding and trust in opaque investment products.

TFSAs allow citizens to invest R36,000 per year up to a maximum of R500,000 in total contributions in their lifetime.

These limitations apply to the contributions made to the account and do not include the growth of the investments. All investment returns earned on the contributions to the tax-free savings account are entirely exempted from tax.

Daily Investor’s Drikus Greyling assessed the return and taxes using the S&P500 index over the past 40 years to establish how much tax people can save using a TFSA.

He modelled the assessment as an investor invested in a rand-denominated S&P500 feeder ETF that took advantage of both investment returns and the weakening rand. The TFSA regulations permit this kind of investment.

40 years were selected as many people will start saving at 25 and typically retire at 65.

For the analysis, the assumption was made that the TFSA had been available since the beginning of the test period.

The assessment showed that an investment in the S&P 500 taxed at the highest tax bracket in South Africa would deliver an ending investment value of R68.2 million. This same investment in a tax-free savings account would deliver an ending investment value of R83.1 million.

This hypothetical scenario shows South African investors can save as much as R14.8 million by using a tax-free saving account with no tax on capital gains.

The table below provides an overview of a 40-year investment in the S&P 500.

Values “Normal” Account TFSA
Ending Investment Value R83,070,376 R83,070,376
Capital Gains R82,570,376  R82,570,376
Inclusion Rate R33,028,150 R0
After Exemption R32,988,150 R0
CGT R14,844,667 R0
Total  R68,225,708 R83,070,376

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