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South Africa To Introduce Tax-Free Savings Options

by Lorys Charalambous,, Cyprus

23 February 2015

South Africa's National Treasury has published the final Notice and Regulations that allow for the introduction of tax-free savings and investment accounts (TFSAs) from the start of the next tax year on March 1, 2015.

The introduction of the TFSAs is seen as "an important tool to encourage South Africans to save more and to reduce household indebtedness and vulnerability. It complements initiatives and incentives to promote retirement savings and will also support long-term economic growth."

The Taxation Laws Amendment Bill 2014 (TLAB) defines a "tax-free investment" as a savings product, financial instrument, or insurance policy complying with the Regulations, and also states that all earnings (interest and dividends) and capital gains from such products will be tax-free in the hands of the owner.

An individual may contribute up to ZAR30,000 (USD2,580) per year in TFSAs, with a lifetime contribution limit of ZAR500,000. However, over time, the balance in these accounts may exceed the ZAR500,000 limit due to accumulated earnings and capital gains.

The Notice lists the service providers that may offer TFSAs to the public and administer those accounts on their behalf. Licensed banks, long-term insurance companies, managers of registered collective investment schemes, stockbrokers, linked investment service providers, and the Government (through the retail savings bond scheme) are listed.

The Regulations detail the products that will qualify as "tax-free investments" to be included in TFSAs. It is stipulated that such products should be "simple to understand, transparent in their disclosure, and suitable for the majority of individuals making use of such savings and investment products."

For example, products may not restrict when returns are paid or the level of returns paid to the individual. Products with performance fees and those that expose an investor to an "excessive" level of market risk will be excluded. Eligible TFSAs must also enable individuals to access their savings and investment within seven business days upon request.

TFSA transfers will not be allowed during the first year of the incentive, until March 1, 2016. The National Treasury intends to expand the Regulations next year to allow individuals to transfer any amount in a TFSA through a set procedure. A transfer of TFSAs between investors, however, will not be allowed.

The final Regulations also provide that existing investor products may not be converted into TFSAs, implying that all TFSAs must be originated with new contributions from the investor, so as to encourage new savings.

As it has been recognized that many low income individuals have invested in products that might not be suitable for their circumstances, the National Treasury has confirmed that it is investigating the possibility of allowing individuals to convert savings or investments that are taxed at a higher rate than their individual marginal personal income tax rates into TFSAs, provided that the accumulated value in such products does not exceed the annual limit of ZAR30,000. If deemed feasible, this option would be finalized later this year.

The issuance of the final Notice and Regulations follows an extensive public consultative process, which began in November last year.

TAGS: individuals | South Africa | tax | investment | business | law | fees | legislation | tax breaks | regulation | Africa | Regulations | Tax

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