2409. Tax free investments

MAY 2015 – ISSUE 188

This is a brief overview of this new class of investments which are available from 1 March 2015.

Tax free income
Section 12T of the Income Tax Act No 58 of 1962 and the related regulations provides that the total earnings (by way of interest and dividends) as well as any growth (by way of capital gains) will not attract income tax, dividends tax or capital gains tax in respect of these investments owned by a natural person or the estate of such person.

How much can I invest?
Contributions to all Tax Free Savings and Investments (TFSIs) will be limited to R30 000 during any tax year and R500 000 over the life of an individual. Investments can also be made in the name of minors. It is accepted however that the balance in these accounts may exceed the R500 000 limit due to accumulated earnings and capital gains.

Service providers are not allowed to accept amounts in excess of these contribution limits. It is, however, the responsibility of the investor to ensure that these limits are not breached, failing which penalties apply.

If any person contributes in excess of the R30 000 in a year or R500 000 in aggregate in tax free investments, an amount equal to 40% of such excess shall be deemed to be normal tax payable in respect of the year in which the excess is contributed. Editor’s comment: Taxpayers should be aware that 40% tax is not on the returns but on the excess contributions.

Who can I invest with?
TFIs may only be issued by and managed by registered banks, long-term insurers, collective investment scheme managers, the government (e.g. retail savings bond scheme), mutual banks and co-operative banks. In addition, authorised stockbroking firms and linked investment service providers may also administer TFSIs.

The investments must be simple to understand and transparent e.g. bank savings accounts, fixed deposits, unit trusts, retail savings bonds, certain endowment policies, linked investment products and exchange traded funds (ETFs) that are classified as unit trusts (e.g. Satrix 40).

It is anticipated that the type of products available for this incentive could be widened in the future.

How can I access my money?
All savings and investment products that have a term of maturity must be accessible within 32 business days from the time the money is requested, while in the case of other products, it must be paid out within 7 business days.

Debit orders, stop orders, ATM transactions and transactional accounts will not be permitted, nor will payments be able to be made with a debit or credit card.

Can I invest in the share market?
TFSIs will allow investors to choose to be exposed to the equity markets but such products need to be adequately diversified. Accordingly, direct investment in particular shares will NOT be allowed.

Can I transfer my existing investments into the new TFIs?
In general, existing investment products may not be converted into TFSIs. This implies that TFIs must be originated with new contributions from the investor so as to encourage new savings. Transfers of TFSIs during the first year until 1 March 2016 will not be allowed. Thereafter it is intended that transfers from one institution to another or from one product provider to another will be allowed. Transfers between investors will, however, NOT be allowed.

What charges will there be?
Performance fees payable to service providers will not be allowed. Fees charged must be reasonable and must not be linked to the length of time of the investment (investment period). In respect of repetitive investments (e.g. monthly payment into a fund investment), no fee can be charged for the investor failing to pay or ceasing to pay.

Fees charged in respect of withdrawals are also controlled by way of regulation.

Horwath Taxation (Cape) (Pty) Limited
ITA: Section 12T