Easy way to save R14.8 million in capital gains tax

South Africa’s tax-free savings accounts (TFSA) offer an easy way for investors to save large amounts on capital gains taxes.

South Africa launched tax-free savings accounts in 2015 as an investment vehicle to incentivise people to increase their savings and lower household debt.

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 on the investments.

All investment returns made on the contributions to the tax-free savings account are completely exempted from tax.

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

The model was built as if 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.

  • 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 that South African investors can save R14.8 million by using a tax-free saving account with no capital gains tax.

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

Values“Normal” AccountTFSA
Ending Investment ValueR 83,070,376R 83,070,376
Capital GainsR 82,570,376R 82,570,376
Inclusion RateR 33,028,150R 0
After ExemptionR 32,988,150R 0
CGTR 14,844,667R 0
TotalR 68,225,708R 83,070,376
DifferenceR 14,844,667.65


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