Treasury aims to close loopholes in tax-free endowment policies

Related Articles

• New year, new savings
• The ETF Monthly Review: September 2019
• The best and worst reasons for drawing from your TFSA

By Nonhlanhla Kunene, 7 March 2016

South Africans breathed a sigh of relief when the widely anticipated income tax hikes during Finance Minister Pravin Gordhan’s budget speech failed to materialise.

Nonetheless, it was not all good news, particularly on the tax-free savings front, as National Treasury proposed amendments to what it perceives to be a loophole in the rules: allowing investors to use their tax-free endowment policies as a means of circumventing estate duty.

With approximately 150,000 tax-free savings accounts (TFSAs) opened since inception and total savings estimated at around R1bn, the response to government’s initiative to promote a greater savings culture in SA “has been most gratifying”, Gordhan said.

However, with earlier research suggesting just over half of all the accounts opened during the first four months (excluding bank deposits) were life policies, Treasury is aiming at closing this loophole. It said in the Budget Review: “Government has become aware that the current law allows individuals who protect their investment portfolio through a long-term insurer to nominate a beneficiary on the endowment policy. As a result, the transfer of the proceeds from the tax-free investment asset to the named beneficiary would circumvent estate duty. It is proposed that the legislation be amended to prevent this.”

Bennie Wessels, Sanlam’s product development actuary, says about 40% of the institution’s policyholders have elected to nominate beneficiaries while roughly 1,300 investors at Momentum have taken this option, according to the head of product development, Mickey Gambale.

While Old Mutual could not give an approximate figure (until 11 March when it receives its interim results), investment actuary Cobus Rothman says the company has always understood that benefits paid to a beneficiary should be included in the estate for calculation of the estate duty, but could be excluded for the calculation of executor fees.

Wessels does not foresee any major impact such a change in regulation would have on Sanlam’s existing policyholders or to the structure of the company’s offering. “The amendment will in all likelihood not prevent policyholders from nominating beneficiaries, it will aim to ensure that nomination of beneficiaries does not result in a situation where estate duty is circumvented.

“Depending on the legislation, policyholders will probably still be allowed to nominate beneficiaries, hence there should be very little impact.”

Rothman believes beneficiaries are currently benefiting as they are able to receive payment soon after the death of a policyholder, instead of having to wait until the estate is wound up. He does, however, believe that before the company can assess what the impact of such an amendment could have, there needs to be some clarification in the regulations of the tax consequences.

As to whether or not these changes could have an impact on future TFSA uptake, Momentum’s Gambale says: “We believe that TFSAs via endowments still offer important benefits to clients. Based on this we believe we will continue to receive a positive uptake of the solution.”