Tax-free savings accounts

1. Introduction

The discussion paper titled “Non-retirement savings: Tax-free savings accounts” (herein after referred to as “the Discussion Paper”) which was published in March 2014 contained adjustments to the first discussion paper which was published in October 2012 and intended to lay the basis for the draft legislation which was to follow.

On 17 July 2014 National Treasury published the draft Taxation Laws Amendment Bill, 2014 (herein after referred to as “the Bill”) which gives effect to the proposals announced in the 2014 Budget - inter alia, the introduction of tax-free savings accounts.

The Bill introduces a new section 12T to the Income Tax Act 58 of 1962 which includes a definition for “tax-free investments”. It also contains other ancillary amendments to the Income Tax Act which are required to make provision for tax free savings accounts (i.e.: amendments to section 10(i), section 29A and section 64F(1)).

2. The Bill

2.1 “Tax free investments” – Section 12T(1)

Section 12T(1) introduces the definition of “tax-free investments”, which is defined as any financial instrument which:

a) is issued by a bank, long-term insurer, portfolio of a collective investment scheme in property or securities or the government;
b) is administered by an authorised user as defined in section 1 of the Financial Markets Act (No. 19 of 2012) or an administrative financial service provider (“FSP”) as defined in Board Notice 79 of 2003 issued in terms of FAIS;
c) is held by a natural person or deceased or insolvent estate of a person; and
d) meets the requirements of the Policyholder Protection Rules (under the Long Term Insurance Act) or the regulations as contemplated in the Collective Investment Schemes Act.

A contribution into a tax-free savings account is therefore equivalent to an investment in a “tax-free investment”.

2.2 Exemption from any tax on earnings – Section 12T(2)

All earnings on tax-free investments will be exempt from tax, including dividends.

2.3 Exemption from capital gains tax – Section 12T(3)

In determining the aggregate capital gain or capital loss of a person, any gain or loss in respect of the disposal of tax free investments must be disregarded.

2.4 Contribution limits – Sections 12T(4)

The proposed annual and lifetime contribution limits remain at R30 000 and R500 000 respectively. The contributions must be in cash – unit transfers will not be allowed.

2.5 Reinvestment of proceeds – Section 12T(5)

Income and proceeds derived from tax-free investments that are re-invested in the tax-free savings account must not be taken into account when calculating whether the taxpayer has exceeded the contribution limits.

2.6 Transfer of funds – section 12T(6)

Transfers of tax-free investments between different service providers will not count towards the contribution limits.

2.7 Exceeding the contribution limits – section 12T(7)

The Discussion Paper initially proposed two options for dealing with over-contributions, namely a complete reversal of the over-contributions (plus earnings) or applying general tax rules to the over contributions. The Bill now introduces a penalty of 40% (additional income tax) on the amount of the excess contributions which will be levied (and administered) by SARS on the individual.

3. Last few comments

3.1 It’s interesting to note that subsection (1)(a)(ii) appears to imply that the administration of these types of products are restricted to authorised users as defined in the Financial Markets Act (being persons authorised by a licensed exchange to perform one or more securities services in terms of the exchange rules) and administrative FSPs. It is not clear whether it was intended to exclude discretionary FSPs from administering this type of product.

3.2 Furthermore, subsection (1)(c) refers to additional requirements in the Policyholder Protection Rules and the regulations as contemplated in the Collective Investment Schemes Act only. No mention is made of any further requirements to be set in respect of financial instruments issued by banks or the government.

3.3 Although the Discussion Paper initially proposed that investors would be allowed to open a maximum of two tax-free savings accounts per year, the Bill makes no reference to a maximum number of tax-free investments - an individual may therefore have multiple tax-free investments. Where contributions are made to more than one tax-free investment the annual limit of R30 000 will be applied to the aggregate of contribution across all tax-free investments.

3.4 It is re-iterated in the explanatory memorandum to the Bill that amounts within the tax-free investments may be withdrawn at any time, with the caveat that if these amounts are returned they will be regarded as contributions and accordingly subject to the annual and lifetime contribution limits.

3.5 As proposed in the Discussion Paper, the explanatory memorandum confirms that the current interest income exemptions will be retained, but these exemptions will not be increased with inflation. The real value will therefore gradually erode whilst affording individuals sufficient time to restructure their investment portfolios in accordance with the new tax regime.

3.6 The explanatory memorandum also states that tax-free investments will be added to the estate of the tax payer and therefore be subject to estate duty. While the investments are held within the estate, the returns thereon will continue to be exempt from income and dividends tax. It is, however, worth noting that when transferring the amounts in the tax-free investments to a beneficiary’s tax-free investment it will be regarded as a contribution and therefore subject to the annual and lifetime contribution limits of such beneficiary.

3.7 The reporting requirements of service providers will be set out in the Business Requirement Specifications to be published by SARS.

4. Conclusion

The public has been invited to comment on the Bill by no later than 17 August 2014. The proposed amendments are to come into operation on 1 March 2015 and apply in respect of amounts contributed in respect of tax-free investments on or after that date.