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Tax-free savings account takes shape

‘Most unit trusts, ETFs eligible, but no direct share purchases allowed’

JOHANNESBURG – While most unit trusts, bank savings accounts, fixed deposits, retail savings bonds and exchange-traded funds (ETFs) will be eligible for inclusion in tax-free savings accounts in future, National Treasury has proposed that direct share purchases should not be allowed.

Following the release of an earlier discussion paper on non-retirement savings, some industry commentators suggested that all investment products should be included in tax-free savings accounts when it is introduced next year.

The tax-free savings account would allow individuals to contribute R30 000 per annum to a tax-free savings vehicle with a lifetime contribution limit of R500 000 and is a means to encourage household savings and to limit the vulnerability of households.

However, as part of the next round of consultation on non-retirement savings, National Treasury on Friday proposed that the trading of individual securities within the tax-free account should not be permitted.

“The objective of the policy is to encourage short to medium term savings and investments and not speculation. If direct purchases were allowed, taxpayers may be tempted to follow a strategy of purchasing highly volatile penny stocks through the tax free account in order to create large short term gains which can then generate tax free income from regular investments in future periods,” it said.

However, investing in ETFs or comparable mutual investments through a stockbroker will be allowed.

Many insurance investment policies also won’t be permitted since it does not allow flexible contributions.

Entities with a banking, or collective investment scheme licence, as well as government will automatically be allowed to offer products via the tax-free savings accounts. Stockbrokers registered with the Financial Services Board (FSB) and the Johannesburg Stock Exchange will also be permitted to offer investment products via this vehicle.

Treasury emphasised that suitable products should be simplistic, transparent and suitable.

Comment on previous proposals

National Treasury received more than 40 written comments in response to its prior discussion paper on the topic.

Many commentators were opposed to an earlier proposal to abolish the interest exemption saying it would compel individuals to sell their current interest-earning assets, which could trigger capital gains tax charges and other penalties.

National Treasury has now proposed that the annual interest exemption (R23 800 for individuals below 65 and R34 500 for individuals above 65) should be retained, but that it would not increase in line with inflation like it did in the past, thereby allowing sufficient time for individuals to make the necessary adjustments to their portfolios over time as the exemption erode.

Although commentators have previously argued that the annual and lifetime contribution limits to the tax-free savings vehicle were too low, these limits were retained at a proposed R30 000 (adjusted for inflation) and R500 000 (not adjusted for inflation in the short term) respectively.

Suggestions to change the structure to allow the replacement of withdrawn capital from the savings account were considered, but Treasury maintains that individuals should not be allowed to replace funds that have been withdrawn.

“This design feature attempts to discourage the use of short to medium term savings (which are likely to be in liquid assets) for impulse purchases,” it said.

While National Treasury previously proposed two types of accounts – an interest bearing one and an equity account, it has now indicated that there may be one type of account that can incorporate both types of investments.

In order not to place certain service providers that may only offer one type of product at a disadvantage, investors will be allowed to open up to two accounts per year.

Practicalities

Pieter Koekemoer, head of personal investments at Coronation Fund Managers, says the tax-free savings account is a very good proposal in general.

It is something that is relatively easy to implement and that will find acceptance in the market place quite quickly, he says.

The fact that there is a constrained initial set of underlying investments is not necessarily such a big problem. Once there is proof that the concept works and there is a better understanding of how the vehicle is used, there is no reason why the range of underlying investments one may hold can’t be expanded, he says.

One small area of practical concern relates to the mechanism that will be introduced to avoid abuse.

Treasury is currently proposing that individuals will be allowed two different accounts from different providers each year.

This could make it somewhat more difficult to deal with abuse.

He says one of the key points of consultation will likely be exactly how to make this proposal work in a way that is fair but that also creates disincentives for individuals to try and game the system without placing onerous requirements on the South African Revenue Service or the product provider.

Kobus Hanekom head of strategy, governance and compliance at Simeka Consultants & Actuaries, a benefit consultancy in the Sanlam Group, says even though there are lifetime caps, the tax-free savings accounts could still form a substantial part of the average South Africans retirement provision.

He says there is no question in his mind that the best way to provide for retirement is to invest funds in a new-generation pension fund, but when someone experiences a life crisis he or she needs to access funds. The tax-free savings account is the type of fund that can provide this.

* The public can submit comments on the proposals to savings.incentive@treasury.gov.za until the end of April. Draft legislation and regulation on the tax-free savings account will be published by July this year.

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