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Sunday, March 1, 2015 - 13:19
Encouraging savings

National Treasury and institutions in the financial services industry are working tirelessly to make a range of tax-free investment products (TFIPs) available to South African investors from March 2015. In these new products, South Africans will be able to hold familiar investments like units in collective investment schemes, bank deposits and retail savings bonds. “The beauty of these new products,” says John Kennedy, Citadel Director: Wealth Planning and Regional Head: Western Cape, “lies in the tax dispensation, as investors will not be liable for any tax on interest, dividends and even realised capital gains generated on investments within this product.”

He explains that it is Government’s goal to encourage South Africans to save more in order to provide for times of need, as well as their retirement. The introduction of TFIPs is one step in a much wider drive to encourage individuals and households to save.
The launch of TFIPs will allow investors to invest discretionary money without paying any tax on dividends, interest or realised capital gains. The eligible products may include exposure to various asset classes, including money market, fixed income, equity and property investments or any combination thereof. The National Treasury’s vision is that these accounts will form the basis of every South African investor’s portfolio.
Currently, individual South African tax payers pay tax on dividends at a flat rate of 15%, irrespective of their other income. Interest earned above the annual exemption of R23 800 (R34 500 for taxpayers over 65 years of age) and 33% of realised capital gains above R30 000 is included in income and taxed at the scales applicable to individuals. As the R23 800/R34 500 exemption was limited only to interest bearing instruments, the proposed new product widens the tax-free investment space to include more options, for example equity funds, by not only allowing for tax-free interest but also for dividends and realised capital gains.
Kennedy says contributions to TFIPs will be limited to R30 000 per investor per annum and a R500 000 cumulative life time limit will apply. These limits will be reviewed in future and may periodically be adjusted for the effects of inflation. The R30 000 annual limit will work on a “use it or lose it” principle and there will not be any roll-over for unused portions of prior years. This is to encourage investors to start saving earlier and save regularly over the long term.
“Although the R30 000 annual limit may seem a little low to some investors, who may consequently contemplate if it will be worth the effort to invest, the amounts will quickly add up. For example, even at the current annual limits a family of four can have investments of R600 000 plus all growth thereon outside the tax net in just five years.”
Former Minister of Finance Pravin Gordhan did not propose an increase in the interest exemption in the 2014 National Budget. It is National Treasury’s intent to keep this exemption at current levels of R23 800/R34 500. The objective is for the annual R30 000 contributions to make up for the interest exemption diminishing in real terms and give investors time to gradually adjust their investment portfolios to the new tax regime.
“Investors may open more than one account at more than one financial institution,” he says, “but will have to monitor their contributions carefully if they do so. The R30 000 annual limit applies to the aggregate of contributions to all TFIPs per individual, not per product. SARS proposed heavy penalties of 40% on any amount contributed in excess of the annual or life time limits.”
Provision was made for transfers between TFIPs at different service providers from a date yet to be announced and such transfers will not count towards the annual contribution limit.
Although the intention is to encourage long term saving, the product itself will have no minimum term and, depending on the underlying investments, funds should be available within days when needed. Obviously an investor should still ensure that the underlying assets within the TFIP match his/her investment horizon. As an example, an investor who is likely to require funds from a TFIP in the short term should probably avoid investing in, say, an equity unit trust. Withdrawals from a TFIP should only be made after careful consideration as amounts withdrawn cannot be replaced – the normal annual contribution limit will apply.
Although a wide range of underlying investments will be available through the TFIPs, direct share portfolios are excluded. We assume this will be to avoid providing a vehicle where active speculative trading can be done in a tax-free environment. The use of derivatives within TFIPs will also be restricted.
On the death of the investor all TFIPs will form part of the deceased’s estate and will be dealt with as set out in the will. The amounts within the TFIPs cannot, however, be transferred directly to an heir’s TFIP. Any transfer of TFIPs from one individual (or his/her estate) to another will be deemed to be a contribution and subject to the annual and lifetime contribution limits of the recipient.
Financial institutions like banks, long term assurers, collective investment scheme management companies and linked investment service providers (LISPs) will be authorised to market TFIPs to the public. We expect most, if not all, major players in the financial services industry to launch versions of this product during 2015, which will have to comply with certain criteria to qualify. It is National Treasury’s aim to have products that are simple to understand, transparent in their disclosure and suitable for the institution’s target market.
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Copyright © Insurance Times and Investments® Vol:28.3 1st March, 2015
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