Picture: 123RF/PHOTOBUAY
Picture: 123RF/PHOTOBUAY

On February 28 2017, the national Treasury announced that transfers of tax-free investments between product providers would be allowed from March 1 2018. A month later, the Treasury also published regulations in terms of section 12T (8) of the Income Tax Act to set out the transfer requirements between product providers.

What opportunities, if any, will transfers bring for investors in these products?

A 2017 Intellidex report titled “A Study of Tax-Free Savings Account Takeup in South Africa” shows investors had already opened about 460,000 accounts by February 28 2017, even though tax-free investments had only been launched two years before, on March 1 2015.

By 2017, according to Intellidex, investors had contributed almost R5.2bn into different types of tax-free investment accounts. The report shows roughly 88% of assets under management (AUM) sat in cash (40.7%), life assurance products (26.5%) or collective investment schemes/unit trusts (20.9%).

The new transfer legislation enables investors to assess their tax-free investments and ensure they are in the best investment structure for their individual circumstances.

Considerations for investors when selecting tax-free investment vehicles

Cash products offer fixed-deposit and notice-deposit options. It seems that notice-deposit products, which provide more flexibility in terms of access at a lower interest rate than fixed-deposit products, are proving to be more popular.

Tax and inflation

One challenge that cash products (including money-market and income unit trusts) have – compared with life assurers and the range of risk-return profiles within the unit trusts space – is competing with inflation.

While a tax-free investment is technically a liquid product that allows immediate access to one’s cash, the annual and lifetime contribution cap reduces every time the investor contributes - and once an amount is withdrawn, the investor cannot “replace” the amount against the contribution caps.

From a tax perspective, it is therefore best to remain invested for as long as possible to maximise the tax benefits.

ABOUT THE AUTHOR: Denver Keswell is a senior legal adviser at Nedgroup Investments
ABOUT THE AUTHOR: Denver Keswell is a senior legal adviser at Nedgroup Investments

Interest exemptions

Another consideration for cash investors in tax-free investments is that every natural person in South Africa is entitled to an interest exemption of R23,800 (under 65) or R34,500 (65 and older).

If a cash investor aged 45 has contributed the maximum of R93,000 in annual contributions over three years and is not using any of the interest exemptions elsewhere, then it is safe to say that from a tax perspective, it wouldn’t matter at this stage if the investor is in a tax-free investment product or a normal notice- or fixed-deposit product.

Let’s look at an example assuming a generous return on a notice deposit product of 8%. This would generate interest of R7,440 for the year, which would fall well below the interest exemption of R23,800.

This investor, who does not use his or her annual interest exemption of R23,800, would not pay tax even if he or she were in a normal notice-deposit product. It would be interesting to note how many of the investors in cash tax-free investments have used all of their annual interest exemptions elsewhere and are actually, from a tax perspective, benefitting from being invested in a cash tax-free investment.

Product features

For investors in tax-free investments to determine whether they are in an appropriate product, they must consider the product features and ask the following questions:

  • Am I able to access my cash if need be from day one?
  • Do I intend to use the product as a legacy product and not withdraw the market value over my lifetime – in which case the allowance of a beneficiary on the product may be important?
  • Am I able to invest without accessing my funds for a number of years?

Exit penalties

Another big consideration – especially considering the negative publicity that dreaded “exit penalties” has received over the past few years – is whether there is in fact an exit penalty on your tax-free investment product.

Can a product provider refuse to abide by transfer regulations?

A product provider may refuse to accept an inbound transfer based on its product rules, but is not allowed to refuse an outbound transfer, except under a few specific circumstances.

In fact, if a provider is unable to transfer an amount on request to another provider, then that provider will not be able to accept any further amount in respect of any tax-free investment, nor can it administer any tax-free investment other than one administered before the date on which it was unable to transfer that amount.

This article was paid for by Nedgroup Investments.

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