It’s likely that you will not be able to transfer existing investments into the new tax-free savings accounts that will be introduced in March 2015, draft regulations released by National Treasury yesterday reveal.
The draft regulations under the Income Tax Act, which have been published for comment, also effectively prevent financial services companies from including structured products, smoothed bonus portfolios, investments with performance fees and investments with maturity terms longer than seven years in the tax-free accounts, or investments that charge high penalties for early withdrawals.
From March 2015, you will be able to invest R30 000 a year in the tax-free savings accounts, up to R500 000 in your lifetime. The money you save in these accounts will be free of income tax, capital gains tax (CGT) and dividends tax.
The draft regulations say only investments issued by registered banks, long-term insurers, collective investment scheme managers and the government will qualify as investments for the savings accounts. This means you will not be able to invest directly in shares or in a few exchange traded products that are not registered as collective investment schemes.
The products that can be offered as investments within the accounts will be regulated by the Financial Services Board.
The draft regulations state clearly that a service provider offering a tax-free savings account will not be able to “convert a pre-existing financial instrument or policy owned by an investor into a tax-free investment”. This means that if you want to move an existing investment into a tax-free savings account, you will have to disinvest from it, potentially incurring CGT. Each year, you are entitled to a CGT exemption of R30 000.
Structured products with investment returns that are a percentage of the return of a market index, a bond or share, or a group of bonds or shares, may not be included in the accounts if the draft regulations are approved, because they prohibit the restriction of receipts or accruals to you in respect of a bond, equity or index.
Investments with performance fees will not qualify for inclusion in the tax-free accounts if the draft regulations are finalised as proposed, because they prohibit percentage fees that vary with the value or performance of an investment.
Policies that pay bonuses if you stay invested for a particular term are also unlikely to qualify as investments for the accounts. The draft regulations say a fee expressed as a percentage of an investment cannot be linked to the period for which you hold the investment.
It also likely that penalty fees for early withdrawals will be restricted. The regulations propose a cap of either R300 or a penalty calculated according to a formula that takes into account the period you have been invested, the investment amount, the years remaining until maturity and the interest rate that could have been earned on the alternative investment with the same starting date that was held to maturity by the product provider.
The draft regulations contain some requirements for tax-free account investments, excluding collective investment schemes, that will ensure they are well diversified. For example, a limit of 10 percent invested in a single share or commodity is proposed.
The regulations will prevent very high-risk investments from being included in the tax-free accounts, because they propose that derivatives can be used in qualifying investments only to reduce the risk of loss or to reduce costs; they cannot be used to gear the investment (borrow to invest).
Other rules that the regulations propose will apply to the tax-free savings accounts are:
* A service provider will have to transfer any withdrawals from the accounts into an account in your name within seven days;
* You won’t be able set up debit orders or stop orders, or use debit or credit cards linked to the accounts, or make ATM withdrawals from the tax-free savings accounts; and
* You won’t be able to invest through the account in a policy that includes life or disability assurance.
A penalty tax of 40 percent of any excess contribution will apply if you contribute more than the annual or lifetime limits. You will be able to reinvest amounts you withdraw, but reinvestments must remain within the limits.