Performance fee loophole closed on tax-free savings

3 Oct 2016

The Treasury has published new draft regulations barring the levying of performance fees and extra charges on tax-free savings account (TFSA) investments, a move that will compel some of the largest providers of these accounts to make changes.

Performance fee loophole closed on tax-free savings

Many TFSA providers invest savers' money in underlying investment funds or with third-party investment managers that charge a performance fee.

"Performance fees may not be charged in TFSAs nor in any of the underlying funds in which the TFSAs are invested," the Treasury said on releasing the amended regulations to the Income Tax Act on Friday, 30 September 2016. The regulations will kick in next March after consultations with industry players.

Old Mutual Emerging Markets, which provides TFSAs with underlying funds, said it welcomed the new regulations.

Jean Minnaar, its savings and investment GM, said he was unable to comment until the group had studied the regulations. He also declined to disclose if Old Mutual's underlying funds charged performance fees. The information is not in its TFSA brochures.

An Intellidex study, published shortly after the introduction of the tax-free savings regime in March 2015, showed take-up of these accounts had been slow, with just 35,384 accounts opened by the companies surveyed. Only 20% of their customers had used the full R30,000 yearly tax-free portion on opening their accounts.

Tax-free savings accounted for R284.3m in assets in 2015, implying an average balance of R8,035 in each account.

Andrew Bradley, an independent adviser and former CEO of Old Mutual Wealth SA, said the Treasury's amendments to the rules governing performance fees were mostly for clarity.

"Performance fees have never been allowed in TFSA products," he said. "As far as I am aware, no companies have charged performance fees either.

"However, some companies did use underlying funds with performance fees built in, and created a mechanism to pay the performance fee charged back to the clients. These amendments will now reduce any confusion about what can and cannot be done."

The Treasury also banned providers from administering TFSAs if they were unable to transfer savings to other TFSA providers on request. All providers are now required to make these transfers within 10 business days of the saver's request, whether the product has a maturity date or not.

Source: Business Day

Source: I-Net Bridge

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