Tax free investments are almost here

From 1 March 2015, natural persons will be allowed to make contributions to so-called "tax free investments" in accordance with the newly introduced s12T of the Income Tax Act, No 58 of 1962 (Act).

The reasons for the introduction of "tax free investments," according to the Explanatory Memorandum on the Taxation Laws Amendment Act, No 43 of 2014, include that household savings have been declining in South Africa (SA) since the early 1980s, and that such savings continue to be low by international standards. According to the Explanatory Memorandum, the existing interest exemption has not been a very visible feature of the South African tax system, which limits its effectiveness as an incentive. In addition, the interest exemption is limited to interest-bearing instruments and does not contain product design features which could encourage households to save.

The legislature has therefore introduced the concept of "tax free investments." Section 12T of the Act allows for the contribution by natural persons of amounts up to R30,000 per annum into "tax free investments," further limited to cash and a lifetime contribution limit of R500,000. The amount of interest or dividends received or accrued to a person in respect of such investments will not be taken into account when determining whether that person has exceeded the contribution limits. Any transfer of an amount from one "tax free investment" to another must also be disregarded when determining whether the person contributed in excess of the contribution limits.

The penalty for exceeding the annual contribution limit of R30,000 in respect of a year of assessment is an amount of 40% of that excess, payable as normal tax by that taxpayer. Similarly, if a person contributes in excess of the R500,000 lifetime contribution limit in respect of "tax free investments," an amount equal to 40% of so much of that excess as has not previously been taken into account in terms of s12T of the Act will be deemed to be an amount of normal tax payable by the taxpayer in respect of the year of assessment in which the excess amount is contributed.

From the Explanatory Memorandum it appears that products for purposes of s12T of the Act may include exposure to money market instruments, equities and property investments. According to a draft notice released for public comment on 14 November 2014, the institutions that will be able to provide these products to taxpayers are:

• banks, as defined in the Banks Act, No 94 of 1990;
• long-term insurers, as defined in the Long-term Insurance Act, No 52 of 1998;
• managers, as defined in the Collective Investment Schemes Act, No 45 of 2002;
• the Government in the national sphere;
• an authorised user, as defined in s1 of the Financial Markets Act, No 19 of 2012; and
• an administrative financial service provider, as defined in board notice 79 of 2003 issued in terms of s15(1) of the Financial Advisory and Intermediary Services Act, No 37 of 2002.

The benefits of making use of this "tax free investment" opportunity, include that any amount received by or accrued to a natural person in respect of such investment will be exempt from normal tax, and any capital gain or capital loss made in respect of the disposal of a "tax free investment" must be disregarded when determining the aggregate capital gain or capital loss of a person for any year of assessment.

It appears from the draft regulations that have been released for public comment that a pre-existing financial instrument or policy owned by a taxpayer cannot be converted into a "tax free investment."