Although we haven’t started hearing Christmas jingles in shopping centres yet, it may have crossed your mind that accumulating ideas for gifting loved ones for the holidays is around the corner.
In South Africa, the government encourages saving by allowing tax-free investments whose returns are exempt from income tax, dividend tax, and capital gains tax.
That means that money grows without being eroded by taxes, which is a powerful gift to set someone up for the future. Imagine a child or grandchild receiving a Christmas gift that keeps growing, tax-free, for years or decades.
Below, I have highlighted what you and the recipient of the gift (the TFIA) need to know about how to gift such an investment legally, how much one can contribute over time, and how to avoid unintended tax consequences.
To gift or contribute safely, you must understand the structure and limits of tax-free investments in SA.
- Annual contribution – R36 000 per tax year
Total contributions across all tax-free investment accounts held by a person must not exceed R36 000 in any one tax year.
- Lifetime contribution – R500 000
Once a person has contributed in total of R500,000 (over all years), no further contributions may be made (though growth continues)
- Exceeding limits
If you contribute more than allowed in a year i.e. R36 000, SARS imposes 40% tax on the extra portion.
Why Gifting into a Tax‑Free Account won’t Trigger Donations Tax
You may have a question: “If I give away money, does that not trigger donations tax?” In South Africa, donations tax does apply in some cases, but many gifts are exempt, and how you structure the gift matters.
To clarify:
- Every individual donor has an exemption of R100,000 per tax year. Gifts, or donations, up to that amount in a year are exempt from donations tax.
- If you give more than R100,000 in a tax year then donations tax at 20% up to R30 million, 25% above may apply on the excess.
- The donor, not the recipient, is liable for paying donations tax.
- In most family gifting cases (especially smaller amounts), your gift will most likely be below that exemption threshold, so to avoid the tax.
So, if you, as a parent or grandparent, gifting up to R36 000 into a TFIA for your child or grandchild for the holiday season, it may be something different and unique to do.
Important nuance: You are gifting the money or investment contribution to someone else to hold in their name (or to open the account). But if you tried to open a TFSA in your name and pretend it’s theirs, that’s not a true gift.
If you’d like to consider this different type of gift, please feel free to reach out.
