On 20 February 2015, National Treasury issued a media statement indicating that the Minister of Finance approved the final notice and regulations introducing tax free investments, which came into effect on 1 March 2015.
The preamble of the regulations, which should be read in conjunction with s12T of the Income Tax Act, No. 58 of 1962 (Act), provides some insight into the Government's objectives in introducing tax free investments, namely to enable providers of of financial products that:
- are simple to understand;
- are offered in a transparent manner;
- carry fees and charges that are reasonable; and
- are suitable for those persons who are not necessarily expert investors.
In support of the Government’s objectives, there are certain compliance requirements that financial product providers will have to adhere to. A financial product provider will have to advertise a tax free investment as being just that: tax free. The designation of the tax free investment must contain the words 'tax free'. A financial product provider may not accept an amount in respect of tax free investments in excess of the annual contribution limit (R30,000), or in excess of the lifetime contribution limit (R500,000) and has a duty to inform an investor of these limits and the consequences of exceeding these limits.
Where a tax free investment is subject to a fixed term but no guaranteed return, the financial product provider must disclose to an investor, in a manner that is readily understandable, all charges, fees or similar costs payable:
- directly or indirectly by the investor out of any amount which forms part of the assets underlying the tax free investment; and
- implicit in the trading or holding of any derivative instrument or other assets underlying the tax free investment.
Any fees charged in respect of tax free investments must be reasonable. If an investor makes repetitive payments of amounts at regular intervals, an issuer may not charge a fee and therefore be penalised if the investor:
- does not pay all of those amounts;
- ceases to pay those amounts;
- pays any amount less than any of those amounts;
- pays a part of the sum of all those amounts; or
- pays the sum of all those amounts.
The regulations further provide that fees may only be expressed as a percentage of the value of the tax free investment in certain circumstances, and limits any fees relating to the withdrawal of an amount from a tax free investment.
The regulations also prescribes the requirements relating to the composition of tax free investments; for example, where the tax free investment has exposure to a share, no more than 10% of the value of that investment may be derived from shares in a single company and no less than 80% of any shares must be listed on a recognised exchange as defined in the Act.
Tax free investments may not be utilised for certain transactions, such as accounts:
- against which debit orders or stop-orders may be debited;
- from which payments or withdrawals may be made from any automatic teller machine or any similar device that dispenses cash to an account holder; or
- from which payments may be made with a debit or credit card.
In addition, an amount in respect of a tax free investment that has a maturity date must be payable to an investor by any product provider within 32 business days or, other than a tax free investment with a maturity date, must be payable to an investor by a product provider within 7 business days after the investor has requested the payment.
At this stage, pre-existing financial instruments or policies owned by investors may not be reclassified or converted into tax free investments. An investor may further not transfer any amount in respect of a tax free investment prior to 1 March 2016. However, it appears to be the National Treasury's intention to expand the regulations next year to allow individuals to transfer any amount in a tax free investment from one institution or financial product provider to another.