National Treasury, 20 February 2015
Treasury on publication of Regulations
for
Tax Free Savings and Investment Accounts
Publication of the final Notice and Regulations for Tax Free Savings and
Investment Accounts
The final Notice and Regulations that allow for the introduction of Tax Free
Savings and Investment Accounts ("TFSAs") with effect from 1 March 2015 (the
start of the new tax year) have been approved by the Minister of Finance.
The Gazette will be published in the next week, but a copy submitted for
publication in the Government Gazette is attached
<http://www.treasury.gov.za/legislation/draft%20legislation/> .
These final Notice and Regulations follows an extensive consultative process
on the first draft Notice and Regulations which were issued on 14 November
2014 for public comment.
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.
Eligible service providers and products
TFSAs may only be issued by regulated institutions such as registered banks,
long-term insurers, managers responsible for collective investment schemes,
the government (through the retail savings bond scheme), mutual banks and
co-operative banks.
It follows that the above institutions may also administer TFSAs for
purposes of section 12T of the Income Tax Act. In addition, an authorised
user (stockbrokerage firms) and a linked investment service provider may
also administer TFSAs.
The version published in the Government Gazette will be legally binding.
Product providers (issuers and administrators) must ensure that the saving
and investment products are simple to understand, adequately transparent and
suitable for investors.
The following products will be eligible as TFSAs; most savings accounts with
banks, fixed deposits, unit trusts (collective investment schemes), retail
savings bonds, certain endowment policies issued by long-term insurers,
linked investment products, and exchange traded funds (ETFs) that are
classified as collective investment schemes.
Contribution limits
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.
Diversification requirements
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.
Transfers
To enable a smooth introduction of tax free savings, transfers of tax free
savings accounts will initially not be allowed, during the first year of the
incentive, until 1 March 2016.
National Treasury intends to expand the Regulations next year to allow
individuals to transfer any amount in a tax free savings and investment
account (through a set procedure) from one institution or product provider
to another.
A transfer of tax free savings and investment accounts between investors,
however, will not be allowed.
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
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.
Structured products
Products that have market exposure, but limit, in any way, the earnings
accruing to investors will be excluded in the current 'phase one' of
eligible products. This would entail products with structured or conditional
pay-off terms and smoothing characteristics.
The National Treasury and the Financial Services Board will develop a
regulatory framework that is more appropriate for these relatively complex
products by the end of this year, following consultations with industry.
Once such a customer-friendly framework is developed, some of these products
could be considered for eligibility.
Disclosure requirements
All product providers (issuers and administrators) must comply with
disclosure requirements as specified under the Financial Advisory and
Intermediary Services Act.
Access
All savings and investment products that have a term of maturity must be
accessible within 32 business days from the time that the money is
requested, while in the case of other products it must be paid out within 7
business days.
Transactional accounts
Savings products that can be used as transactional accounts are not allowed.
Debit or Stop Orders, and ATM transactions will not be permitted features of
TFSAs.
Issued by:
National Treasury <http://www.treasury.gov.za/>
From:
http://www.gov.za/speeches/publication-final-notice-and-regulations-tax-free
-savings-and-investment-accounts-20-feb
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