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Tax-free savings: Three things you should know

How estates, creditors and hedging instruments are treated.

JOHANNESBURG – Following the introduction of tax-free savings accounts on March 1, product providers have started their marketing efforts and a wide variety of options are now available.

Tax-free savings accounts offer South Africans the opportunity to invest up to R30 000 per annum (R500 000 over a lifetime) and investors won’t pay any tax on the returns (capital gains, dividends and interest) in these accounts.

But as investors start to ponder the pros and cons of using tax-free savings accounts in their personal investment portfolios, a number of important questions have been raised.

In this article, three of those are considered.

1. What happens to my tax-free savings account when I die? Will my heir get any tax benefits if the inheritance comes from a tax-free savings account?

Natasha Marhye, legal advisor at MMI Investments and Savings: Retirement Solutions, says upon the death of the account holder, the proceeds of a tax-free savings account (the capital and all returns earned prior to death), will form part of “property” as defined in the Estate Duty Act. This means that estate duty will be levied on this amount.

In terms of the explanatory memorandum issued by the South African Revenue Service (Sars), the returns earned by the estate after the date of death will not be included as “property” in the estate.  

Marhye says a tax-free savings account cannot be transferred from the account holder’s name to any other person or heir.
If a person inherits a tax-free savings account in terms of a will, the proceeds of the tax-free savings account will be paid to that beneficiary or heir as per the rules of the tax-free savings account product i.e. the fund value or proceeds as at the date of death will not be subject to tax when it is paid out to the nominated beneficiary.

However, if that beneficiary then decides to invest those proceeds into his/her own tax-free savings account (or take out a tax-free savings account in their own name), that amount will count towards their own annual and lifetime limits, she says.

There should also be a beneficiary nomination form of some sort that the account holder should complete indicating how and to whom he/she wants the proceeds of their tax-free savings account to be paid out, in the event of his death, she says.

2. Retirement fund assets are protected against the claims of creditors. Is this also the case for tax-free savings accounts?

Marhye says a retirement benefit is protected against the claims of creditors because section 37C of the Pension Funds Act specifically excludes a retirement benefit from forming part of the deceased estate. In terms of section 37C the allocation and distribution of retirement benefits are dealt with by the fund’s trustees and this process is completely separate from the estate.

There is no similar provision pertaining to a tax-free savings account. In fact, National Treasury indicated in the explanatory memorandum to the Income Tax Amendment Act, that contributions to a tax-free savings account and all investment returns earned up to the date of death will form part of the deceased estate. This means that this amount does not enjoy any special protection and will be dealt with in the same manner as the rest of the estate.

3. Are fund managers allowed to use hedging instruments in unit trusts in a tax-free savings account wrapper?

Rowan Burger, executive: Large Corporate Segment (Momentum) says basically each license has investment rules. Unit trusts and life companies have these. The principles are that derivatives can be used for protection and asset allocation. They cannot be geared or be seen as speculative in nature (you can’t short a share). So the funds qualifying would not be considered hedge funds. 

 

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