Amendments to tax free investment regulations

Section 12T exempts certain taxpayers from paying normal tax on any amount received by, or accrued in respect of a TFI. Section 12T further states that, in determining the aggregate capital gain or capital loss of a person in respect of a year of assessment, any capital gain or capital loss in respect of the disposal of a TFI must be disregarded. Contributions to a TFI must be limited to cash, R30,000.00 in aggregate during any year of assessment and R500,000.00 in aggregate.

In the 2016 Budget, it was stated that TFIs were introduced to encourage individuals to save and not intended to serve as a vehicle to avoid estate duty. According to the Government, it has become aware that the current law allows individuals who protect their investment portfolio through a long-term insurer to nominate a beneficiary on the endowment policy. The transfer of the proceeds from the TFI asset to the beneficiary would circumvent estate duty. The Government therefore proposes to pass an amendment to the Act in order to prevent such circumvention of estate duty.

The 2016 Budget further stated that, currently, investors receiving dividends from TFIs must submit an exempt dividends tax return to the SARS following the receipt of every dividend payment. The dividends received from TFIs are exempt in terms of s64F(1)(o) of the Act. The Government proposes to remove the requirement to submit an exempt dividends tax return.

Lastly, the 2016 Budget proposed to postpone the implementation date to allow transfers of TFIs between service providers from 1 March 2016 to 1 November 2016 in order to allow more time for service providers to finalise the administrative processes required for such transfers. The date, 1 March 2016 was substituted by 1 November 2016 in terms of the regulations published in the Government Gazette, No 39765 on 1 March 2016. These regulations came into operation on 1 March 2016.

In the 2016 Budget, the Government proposed to introduce draft regulations to outline the transfer process, which have been released and will come into force on 1 November 2016. The draft regulations contain the basic requirements for a valid transfer that will not count against the annual and lifetime limits of a TFI mentioned above.

The draft regulations state that product providers will only be allowed to transfer TFIs directly to another product provider. According to the press release issued by National Treasury on 08 March 2016, investors may not accept transfer amounts into their own accounts outside of a tax free savings account as this will be considered to be a withdrawal. If the amount is subsequently reinvested into a tax free savings account it will have an impact on the annual and lifetime limits.

The draft regulations further state that a product provider must transfer an investor’s TFI to another product provider within ten business days from being instructed to do so by the investor. However, a product provider is not obliged to transfer an amount in respect of a TFI of the same natural person, deceased estate or insolvent estate of the same natural person more than twice a year.

The transferring product provider must also provide the receiving product provider and the investor with a transfer certificate, which all parties must retain for a period of five years after the issue of the certificate. The draft regulations further state the minimum information which must be reflected on such a transfer certificate.

According to the press release, the reporting fields on the IT3(s) for TFIs have already been incorporated and will make it easier to transition into a regime that allows transfers.

The public has been invited to submit comments to the draft regulations to the National Treasury by, 8 April 2016.