The government introduced tax-free investments (TFIs) on March 1 2015. The Income Tax Act (58/1962) was accordingly amended to introduce a new Section 12T, in addition to the notice and regulations published in the Government Gazette on February 25 2015.
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 loss of a person in respect of a year of assessment, any gain or loss in respect of the disposal of a TFI must be disregarded. Contributions to a TFI must be limited to cash: R30,000 in aggregate during any year of assessment and R500,000 in overall aggregate.
Estate duty circumvention
The 2016 Budget stated that TFIs had been introduced to encourage individuals to save – and were not intended to serve as a vehicle for the avoidance of estate duty. Apparently, the government has become aware that the present 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 thus circumvents estate duty. The government has therefore proposed to pass an amendment to the Income Tax Act to prevent this circumvention.
Exempt dividends tax return
The 2016 Budget further stated that at present, investors receiving dividends from TFIs must submit an exempt dividends tax return to the South African Revenue Service following the receipt of every dividend payment. However, the dividends received from TFIs are exempt in terms of Section 64F(1)(o) of the Income Tax Act. The government has therefore proposed removing the requirement to submit the redundant tax return.
Transfers of TFIs between service providers
The 2016 Budget proposed postponing the implementation date for allowing transfers of TFIs between service providers from March 1 2016 to November 1 2016, in order to allow more time for service providers to finalise the administrative processes required for such transfers. The date substitution was provided by regulations published in Government Gazette 39765 on March 1 2016. These regulations came into operation on March 1 2016.
The budget also proposed introducing draft regulations to outline the transfer process, which have been released and will come into force on November 1 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.
The draft regulations state that product providers will be allowed to transfer TFIs only directly to another product provider. According to the press release issued by the National Treasury on March 8 2016, investors may not accept transfer amounts into their own accounts outside of a tax-free savings account, since this will be considered a withdrawal. If the amount is subsequently reinvested into a tax-free savings account, it will affect 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 10 business days of 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 five years after the issue of the certificate. The draft regulations further establish the minimum information which must be reflected on such a transfer certificate.
According to the press release, the reporting fields on the IT3(s) form for TFIs have already been incorporated and will make it easier to transition into a regime that allows transfers.
For further information on this topic please contact Mareli Treurnicht at Cliffe Dekker Hofmeyr by telephone (+27 11 562 1000) or email (firstname.lastname@example.org). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.
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