Regulatory amendments to tax free investments

On 31 March 2017, Government Gazette (GG) 40758 was published, in terms of which the regulations relating to the requirements for Tax Free Investments (Regulations), were amended by National Treasury (Treasury). The Regulations were originally published in February 2015 in terms of s12T(8) of the Income Tax Act, No 58 of 1962 (Act). The Minister of Finance (Minister) is empowered to make regulations prescribing the requirements to which a financial product must conform in order to constitute a tax free investment (TFI).

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By way of background, a TFI is defined in s12T(1) of the Act as any financial instrument or long-term policy (as defined in s1 of the Long-term Insurance Act, No 52 of 1998) which is owned by a natural person, a deceased estate or an insolvent estate of a natural person (Qualifying Taxpayers), and administered by a person or entity designated by the Minister by notice in the GG (Product Provider). Section 12T of the Act provides that any amount received by or accrued to a Qualifying Taxpayer in respect of a TFI is exempt from normal tax and the capital gain or loss from the disposal of such TFI is disregarded for purposes of capital gains tax. In addition, a dividend paid in respect of a TFI is exempt from dividends tax in terms of s64F of the Act.

Contributions in respect of TFIs are required to be made in cash and, as of 1 March 2017, are limited to an annual amount of R33 000 in aggregate during any year of assessment and subject to a lifetime limit of R500 000 in aggregate. The exempt amount received by or accrued to a Qualifying Taxpayer in relation to the TFI is not taken into account in determining whether an excess amount has been so contributed in a given year of assessment or in aggregate. In addition, the transfer of a TFI account, of whatever nature of a Qualifying Taxpayer to another TFI account, of whatever nature of the same Qualifying Taxpayer and any amount received by or accruing in respect of a TFI is not taken into account in determining whether the Qualifying Taxpayer has contributed in excess of the annual and lifetime limits.

Penalties are triggered in the instance where a Qualifying Taxpayer contributes amounts in excess of the abovementioned limits. If during any year of assessment, a Qualifying Taxpayer contributes more than the annual limit, the excess is subject to normal tax at the rate of 40%. Whereas if a Qualifying Taxpayer contributes more than the lifetime limit in aggregate, 40% of so much of the excess as has not previously been taken into account, is deemed to be an amount of normal tax payable in respect of the year of assessment in which such excess was contributed.

The amendments to the Regulations contained in GG 40758 deal with, inter alia, the process for the transfers of TFIs, performance fees in underlying funds, restriction on maturity dates, fees to be recovered by Product Providers and various provisions to enable the Financial Services Board (FSB) to adequately administer product offerings.

Treasury has also, in GG 40757 (published on 31 March 2017), included the South African Postbank Limited in the list of Product Providers empowered to administer TFIs. We discuss the amendments to the Regulations in more detail below.

Transfers of TFIs

GG 40758 provides that, upon request by a Qualifying Taxpayer, a Product Provider must transfer amounts in cash or assets other than cash in respect of a TFI of the Qualifying Taxpayer to another TFI of the same Qualifying Taxpayer:

i)     to the extent that the TFI has a maturity date, within 10 business days after the Qualifying Taxpayer’s request or after the maturity date;

ii)    where the TFI has no maturity date, within 10 business days after the Qualifying Taxpayer’s request.

Provision has been made in GG 40758 for Product Providers to refuse to accept any transfer as described in (i) and (ii) above in respect of a TFI. Despite a Qualifying Taxpayer’s request, a Product Provider may not transfer any amount in relation to a TFI, in respect of the same natural person, more than twice in a year of assessment and a Product Provider must refuse to transfer any amount in relation to a TFI during the last 10 business days of any year of assessment.

To the extent that a Product Provider is unable to transfer any amount in respect of a TFI to another Product Provider, the first mentioned Product Provider will not be able to accept any further amounts in respect of any TFIs administered by such Product Provider. In addition, the Product Provider will not be able to administer any TFI other than a TFI administered before the date on which the Product Provider is unable to transfer an amount.

GG 40758 goes on further to include the minimum requirements for a valid transfer between Product Providers, such as a transfer certificate and the type of information that must be passed on to the new Product Provider.

Due to the additional administrative requirements imposed on Product Providers, the ability of Qualifying Taxpayers to transfer amounts will be postponed to 1 March 2018 to allow Product Providers sufficient time to prepare for the more onerous responsibilities discussed above.

Performance fees in underlying funds not allowed

GG 40758 states that performance fees may not be charged by Product Providers in TFIs, whether charged as part of the TFI or in an underlying fund into which the TFI contributions are invested. Accordingly, Product Providers must ensure that TFIs do not, in any way contain any performance fees.

Restriction on maturity date

A Product Provider may not offer any TFI with a fixed-term of which the maturity date occurs more than five years after the date on which that TFI is issued.

Fees to be recovered from the TFI

To the extent that the Product Provider is required to recover any fee in respect of the TFI, the Product Provider may only recover such fee from the TFI.

Compliance with regulations

Product Providers will be required to notify the FSB, within one month before a TFI product is advertised in the market, in order to provide the FSB with an opportunity to review the features of the offering and suggest amendments, if necessary. Such notification must include details of the TFI including the:

i)     date from which the TFI will be advertised or when members of the public will be allowed to invest therein;

ii)    name and nature of the TFI;

iii)   legislation under which the TFI will be issued together with confirmation that the TFI meets the requirements of the legislation; and

iv)   a summary of the benefits, terms and conditions and marketing material of the TFI.

GG 40758 requires that any change undertaken subsequently to the launching of the product should also be submitted to the Financial Services Board (FSB), at least one month prior to the date on which the alteration takes effect.

Furthermore, where the FSB objects to the intended implementation of a TFI, the Product Provider may not implement the intended TFI until such a time as the objection has been resolved by the FSB.

It will be interesting to see whether these amendments will ensure that TFIs are offered in a transparent manner and carry fees and charges that are reasonable, in order to ensure that customers derive maximum benefits from the vast number of savings and investment products available in the market.

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