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Proposed Amendments to Tax Free Savings

The late publication of draft regulations for Tax Free Savings Accounts (TFSAs) on the National Treasury’s website means that there are only 10 days left for comment from the industry, according to Pam Saxby for Legalbrief Policy Watch.

The updated draft regulations cover:

  • revised wording for the treatment of performance fees
  • a relaxation on the rules of access and
  • adjustments to disclosure and compliance requirements.

Performance Fees

The policy intent with regard to the treatment of performance fees has been communicated consistently since the first publication of the draft regulations to tax free savings accounts in November 2014. Performance fees may not be charged in TFSAs nor in any of the underlying funds in which the TFSAs are invested. The amended wording is intended to make the Regulations clearer by removing any ambiguity in relation to performance fees.

Access to tax free savings accounts

As a principle, TFSAs should be available to investors for any short term needs, including emergencies, large expenditures and asset purchases. Consequently, the ability of investors to access their savings should not be unduly restricted.

However, the current rules which offer access to amounts within 32 days for products with a fixed term and seven days for those without a fixed term appear to have limited the ability of product providers to offer fixed term deposits. Individuals are thus not able to invest in fixed term deposits with higher interest rates as there are few of these products available.

In balancing the above two interests, National Treasury proposes a relaxation of the rules on accessibility, which would allow product providers discretion to only allow individuals access upon the maturity date of the product. Product providers can, however, still allow investors to access these funds before maturity, as is the case with regular fixed term deposits. The current rules that limit the exit penalty on early withdrawals will remain to safeguard investors against excessive penalties when withdrawing or transferring before maturity.

Legalbrief notes that:

  • Regulation 6 (disclosure by a product provider) should include a formula for calculating the guaranteed return on a fixed-term investment;
  • the 32-business-day timeframe provided in sub-clause (b) of Regulation 8 (payment of amount in relation to a withdrawal in respect of a tax free investment) should be reduced to seven; and
  • a new Regulation 10A should impose a five-year cap on the maturity date of any fixed-term investment offered tax free.

Transfers

In addition to the amendments to transfers, National Treasury proposes to make amendments to address some compliance issues and the administration of fees.

Legalbrief states that, in the new Regulation 4, the condition ‘in excess of the lifetime contribution limit’ would be removed, and the calculations concerned linked to sub-sections 12T(4)(a) and (c) of the Income Tax Act. A comprehensive new Regulation 9 would allow a product provider to refuse a transfer, and make issuing a transfer certificate mandatory.

Compliance

Product providers will be required to notify the Financial Services Board (FSB) within a calendar month before a new product is advertised in the market. The FSB will be able to review the features of the product for compliance with the Regulations and endeavour to respond to the product provider within the calendar month.

However, product providers will not be compelled to await the regulator’s response on expiry of the calendar month, but the regulator may make certain queries on the compliance of the products after they have been rolled-out.

National Treasury will engage in an additional round of consultations with industry. The transfer regulations will come into effect on 1 March 2017, allowing a number of months after the release of the final Regulations for product providers to adjust their systems to comply with the new requirements.

The draft amendments and the gazetted postponement (Gazette No: 40308 published 28 September 2016) are published on the National Treasury website at www.treasury.gov.za.

The closing date for comments is 14 October 2016. Please send to savings.incentive@treasury.gov.za

Comment

It appears from the above that there is a move towards indications in the RDR documentation to:

a) hold product providers more accountable for their wares and
b) approve products for the mass market.

Only time will tell if allowing product providers to launch products if the Regulator is unable to approve the product within 30 days will work in practice. The fact that the rules regarding performance fees already needed revision is an indication that the search for loopholes still outgun the ethical approach for complying with the spirit of the legislation.

There are simply too many examples of action by the FSB’s Enforcement Committee against product providers who transgressed legislation and then blamed faulty legal opinion for the oversight. In some instances it is difficult to align the fines with the severity of the transgression.

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