The final Notice and Regulations that allow for the introduction of Tax Free Savings and Investment Accounts (“TFSAs”) with effect from 1 March 2015 were approved by the Minister of Finance, according to a media release by the National Treasury on Friday.
This incentive is an important tool to encourage South Africans to save more and to reduce household indebtedness and vulnerability. It complements initiatives and incentives to promote retirement savings and will also support long-term economic growth. This tax incentive is enabled through section 12T of the Income Tax Act and these Notice and the Regulations. The earnings (interests and dividends) and growth (capital gains) on these products will not attract income, dividends or capital gains tax.
The Regulations aim to ensure that appropriate financial products are developed and market conduct practices are in line with the objectives of financial sector regulatory reform. In this respect, it is important that customers are treated fairly, and that the charge structure is kept relatively low to ensure that customers derive maximum benefits from such savings and investments.
Contributions to all tax free savings accounts will be limited to R30 000 during any year and R500 000 over the life of an individual. However, over time the balance in these accounts may exceed the R500 000 limit due to accumulated earnings and capital gains. Product providers (i.e. issuers and administrators) must disclose these contribution limits and the consequences for breaching them when marketing products as TFSAs to investors.
Service providers are not allowed to accept amounts in excess of the contribution limits. It remains the responsibility of the investor to ensure that he or she adheres to the annual and lifetime limits or else face the penalties for breaching these limits.
TFSAs that give investors exposure to the equity market (shares, including shares in REITs) must be adequately diversified. This follows from the stated product principle of suitability. Direct share trading (including shares in REITs) or products that otherwise do not comply with the diversification requirements in the Regulations will not be permitted.
Conversion of pre-existing products into TFSAs
The final Regulations provide that existing investor products may not be converted into TFSAs, implying that all TFSAs must be originated with new contributions from the investor. The aim of this requirement is to encourage new savings. However, many low income individuals have invested in products that might not be suitable for their circumstances and are taxed at a higher rate than their individual marginal personal income tax rates (e.g. endowments policies for an individual with taxable income that is taxed at marginal tax rate lower than 30 per cent). The National Treasury is investigating the possibility to allow individuals to convert their savings or investment in current products into tax free investments where the accumulated value in such products does not exceed the annual limit of R30 000. Such a possibility, if deemed feasible, will only be finalised later this year.
Performance fees will not be allowable for TFSAs. This current approach will be reviewed in the future as part of other reviews, for example, the currently discussed Retail Distribution Review. This will be done taking into account the need to treat customers fairly and lower charges in the financial industry.
Please click here to download the relevant regulations which will be gazetted this week.