But as investors ponder the pros and cons of using tax-free savings accounts in their personal investment portfolios, several important questions arise:
1. Inheritance: will my heir get any tax benefits if the inheritance comes from a tax-free savings account?
Natasha Marhye, legal adviser 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 memo 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.
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 licence has investment rules. Unit trusts and life companies have these. The principles are derivatives that 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.