Tuesday, 15 November 2016

Final Changes to the Special Voluntary Disclosure Programme

IMPORTANT NOTICE: 
These changes must be read together with my primary article on the Special VDP 

On 26 October 2016 the Minister of Finance tabled the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, Bill 19 of 2016 in Parliament when he introduced the so-called Mini Budget. This Bill contains the legislation regulating the Special Voluntary Disclosure Programme (“SVDP”) which commenced on 1 October 2016 and which will come to an end on 30 June 2017. The Bill, as tabled confirms that the SVDP will run for nine months as opposed to the originally announced period of six months.

Under the SVDP, qualifying applicants must include in their 2015 tax income an amount equal to 40 per cent of the highest amount of the Rand value of the unauthorised foreign assets at the end of each year of assessment ending on or after1 March 2010 but not ending on or after 1 March 2015. Thus, the Bill gives effect to the Treasury’s announcement in September that the inclusion rate has been reduced from 50 per cent to 40 per cent.

In addition, the Bill contains a provision whereby the base cost of the unauthorised foreign assets for which an application is lodged under the SVDP will be deemed to have been acquired on 28 February 2015 a cost equal to the highest market value, in foreign currency, of that asset as determined under clause 16 of the Bill. 

Clause 16 refers to the manner in which the amount to be included in the applicant’s taxable income in 2015 is to be determined. This is based on the market value of the unauthorised foreign assets in the relevant foreign currency and translated into South African Rands at the spot rate on the last business day in South Africa at the end of each year of assessment in question, namely, 28 February 2011, 29 February 2012, 28 February 2013, 28 February 2014 and 28 February 2015. 

This is a concession to taxpayers in that the base cost of the foreign assets is effectively increased when determining the capital gain that will be liable to tax when the foreign assets are ultimately disposed of. Instead of relying on the historic cost of the foreign assets taxpayers will be entitled to rely on the market value used to determine the tax payable on those foreign assets under clause 16 of the Bill.

It must be noted that if the proceeds received on the sale of the foreign assets is less than the adjusted base cost, the cost will be limited to the proceeds received. Thus no capital loss will be allowed to be carried forward to a future year in such cases.

Furthermore, the SVDP legislation makes it clear that where any amounts exempt from tax under the SVDP legislation were received or accrued by way of an inheritance or donation, that inheritance or donation must be exempt from estate duty under the Estate Duty Act or donations tax under the Income Tax Act in the hands of the estate or the donor. 

Where, for example, an applicant seeks relief under the SVDP in respect of unauthorised foreign assets held by a deceased relative on which estate duty was not paid the estate duty that should have been paid by the deceased effectively falls away. 

Similarly, where an applicant donated assets to a foreign trust on which donations tax should have been paid that donations tax is effectively waived where the donor makes the election available under the SVDP legislation to treat the assets owned by the foreign trust as belonging to them for income tax and estate duty purposes.

The SVDP legislation also deals with controlled foreign companies subject to the provisions of section 9D of the Income Tax Act. 

Where, for example, an applicant transferred funds from South Africa and invested that in a controlled foreign company and that company is located in a low tax jurisdiction, the income derived by the controlled foreign company should have been declared as part of the income of the applicant. 

In such a case the income that should have been attributed in favour of the applicant will not be liable to tax but the applicant can apply for SVDP relief on the basis that 40 per cent of the highest market value of the controlled foreign company at the end of 2011 – 2015 tax years must be included in the applicant’s income in the 2015 year of assessment.

It remains to be seen when the SVDP legislation will be promulgated in the Government Gazette but this should not delay prospective applicants from collating the information required to apply for SVDP relief and to start submitting applications to the South African Revenue Service on the basis that it is possible to submit applications for SVDP relief via the SARS e-filing system, both for tax and exchange control purposes.

Dr Beric Croome 
Tax Executive
ENSafrica

Monday, 14 November 2016

Reviewing the Tax Ombud’s Annual Report 2015/16

The Tax Administration Act (“TAA”) no 28 of 2011 created the office of the Tax Ombud as an office to deal with complaints by taxpayers which SARS has failed to resolve. 

The Tax Ombud, namely, Judge B. Ngoepe took office in October 2013 and recently released his annual report for 2015/16. From a review of that report it is clear that the number of complaints made by taxpayers to the office is increasing which indicates that taxpayers are becoming aware of the existence of the office and its purpose.

The Tax Ombud identified the delay on the part of SARS in finalising complaints as a cause for concern. From a review the summary of complaints outstanding, which the Tax Ombud is unable to finalise as a result of delays on the part of SARS, too many complaints remain outstanding for an extended period of time.

Furthermore, the Tax Ombud has identified challenges facing its office regarding the fact that the office cannot employ its own staff directly and can only do so in consultation with SARS. The Tax Ombud made representations that the TAA should be amended to allow for his office to employ staff directly without having to consult SARS. 

The Tax Ombud recently launched his Annual Tax Ombud Report 2015/16
©iStock.com/ "Executive Research" by sdominick
In addition, currently the office of the Tax Ombud’s expenditure is paid out of the funds of SARS which means that the office of the Tax Ombud does not have financial independence from SARS. It has been proposed that in future the funding of the office of the Tax Ombud will be by way of a budget allocated by the National Treasury and not out of the funds of SARS which should enhance the financial independence of the office.

The proposals to enhance the independence of the office of the Tax Ombud are contained in the tax bills to be tabled in parliament on 26 October.

A further difficulty facing the office of the Tax Ombud is that SARS has failed to update the SARS Service Charter which was last done in 2009. The Tax Ombud’s annual report indicates that the office provided SARS with a draft Taxpayer Bill of Rights for consideration. The Commissioner for SARS indicated recently that an updated taxpayer’s service charter would be released before the end of 2016 and that taxpayers would be able to submit comments before the documents is finalised and adopted.

Taxpayers must remember that the mission of the office of the Tax Ombud is to be an efficient, independent, impartial and fair redress channel for taxpayers who have had complaints against SARS which have not been satisfactorily resolved. 

It must be noted that the office of the Tax Ombud is unable to intervene in legal disputes but is there to assist those taxpayers who have encountered poor service from SARS or other administrative problems in their dealings with SARS. In the 2015/16 period the office of the Tax Ombud received 5904 contacts from taxpayers, not all of those constituted complaints, but also included enquiries received from taxpayers as to the purpose and function of the office of the Tax Ombud. 

A summary of the contacts received by the office of the Tax Ombud is set out below.
   
Contacts received
No. of Contacts
%
Queries received
3 771
64%
Complaints not falling within OTO mandate – rejected
938
16%
Complaints falling within OTO mandate – accepted
961
16%
Terminated complaints
234
4%
TOTAL
5 904
100%

From the table set out above, it would appear that out of the 5904 contacts received from taxpayers just under 1000 of complaints received fell within the mandate of the office. During the presentation of the Tax Ombud’s annual report for 2015/16 it was indicated that 87% of all complaints where resolved in favour of taxpayers. Complaints received by taxpayers related predominantly in respect of assessments, dispute resolution, refunds and account maintenance and a host of other issues.

Complaints were received from taxpayers both in South Africa and those outside of the country.

It is disturbing that out of the 961 complaints regarded as falling within the mandate of the office of the Tax Ombud, 460 thereof were unresolved by SARS and 86% of those complaints were already outside the turnaround time available to SARS. It is clear therefore that the level of service which taxpayers can receive from the office of the Tax Ombud is to a large extent dependent upon the turnaround time provided by SARS in dealing with complaints received by the office of the Tax Ombud.

64% of all complaints accepted by the office were service related, with 21% being procedural in nature and 15% administrative in nature. In 2014/15 the office only accepted 409 complaints and this increased to 961 in 2015/16. The annual report contains a summary of the types of complaints received by the office from taxpayers and the time period for which those complaints have been outstanding with SARS. 

It is unacceptable that so many complaints remain outstanding for an extended period of time which would indicate that SARS does not appear to take the resolution of taxpayers’s complaints seriously.

This does not enhance tax compliance as international research has shown that where taxpayers believe they have been treated fairly compliance levels are enhanced.

There were many complaints from taxpayers regarding the delays in payment of refunds which unfortunately continues to be a problem nationally and this has received ongoing coverage in the media. It remains to be seen if the office of the Tax Ombud will regard the delay in finalising refunds as a systemic issue which he will investigate of his own accord to understand the reasons therefore. 

Other complaints identified related to:
·         Delays in issuing tax clearance certificates;
·         Incorrect allocation of payments made by SARS;
·         Victims of identity theft;
·         Non-adherence by SARS to dispute resolution timeframes;
·         Failure by SARS to respond to requests for reasons for assessments;
·         SARS taking collection steps when legally barred from doing so;
·         Hijacking of e-filing profiles.

It would appear that taxpayers are becoming aware of the existence of the office of the Tax Ombud and where they have exhausted SARS’s internal complaints procedures they are resorting to the office of the Tax Ombud in an attempt to seek resolution of their complaints.

It is hoped that the Taxpayer’s Service Charter will be released by the end of the year so the taxpayers know and understand what levels of service they can expect in their dealings of SARS. 

Furthermore, it is important that SARS attends to taxpayers complaints timeously and that in subsequent Ombud’s annual reports, the turnaround time for complaints resolution by SARS will improve.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, November 2016. Image purchased www.iStock.com ©iStock.com/ "Executive Research" by sdominick

Friday, 11 November 2016

Bloomberg's European Tax Services Volume 18, Issue 10 : Publication

My article on the special Voluntary Disclosure Programme.
This article first appeared in European Tax Service, published by Bloomberg BNA,
October 2016, volume 18, issue 10. #VDP www.bna.com.
You can subscribe to Bloombergs on-line magazine at www.bna.com.
Here is the article:



Monday, 10 October 2016

Davis Tax Committee: Final Report on Estate Duty

On 24 August 2016, with the consent of the Minister of Finance, the Davis Tax Committee (“DTC”) published its final report on macro analysis of the tax system, small and medium enterprises and estate duty.

The committee advised that it would conduct a further investigation into wealth taxes and that this would be dealt with in a separate report.

The estate duty report dealt with estate duty and trusts, and contains a number of recommendations which need to be evaluated by the National Treasury with a view to amending the tax laws.

The DTC recommends that the estate duty regime should be reviewed in order to establish an effective and equitable package of major abatements and rates of duty.

The retirement fund abatement currently available should be retained,  while the maximum threshold for tax deductible retirement fund contributions should be increased from the current cap of R350 000.00 per year to take account of inflation.

The DTC recommends that the inter-spousal estate duty deduction under section 4(q) of the Estate Duty Act should be withdrawn and replaced with a substantial increased primary abatement thus ensuring consistent and equitable treatment for all taxpayers regardless of marital status.

The report recommended that the primary abatement for estate duty should be increased to R15 000 000 for all taxpayers. Furthermore, it has been proposed that the rate of estate duty be increased from 20% - 25% of the dutiable value of an estate exceeding R30 000 000.

Final Davis Tax Committee report tackles marital status discrimination and
primary abatements in estate duty tax law

Image purchased from www.iStock.com ©iStock.com/"Senior couple checking their accounts at home" by  

Troels Graugaard 

There has been some discussion regarding the imposition of estate duty and capital gains tax on death and whether that amounts to double taxation. The DTC indicated that Capital Gains Tax (“CGT ”) is regarded as an income tax on capital and not a wealth tax and that estate duty and donations tax are wealth taxes and therefore the DTC does not agree with the contention that estate duty and CGT amounts to double taxation and does therefore not support the call for estate duty to be removed.

It has also been recommended that the current roll-over provisions available relating to inter-spousal bequests under the CGT rules should be repealed and replaced with a generous exemption available on death of R 1 000 000.

Whilst proposing the removal of  the inter-spousal exemption for estate duty and CGT the DTC recommends that the inter-spousal exemption within the donations tax system should also be removed. It proposes  an exemption from donations tax that should be provided for the reasonable maintenance of the taxpayer and their family.

It has been suggested that the transfer of assets in accordance with a divorce order should be subject to exemption similar to the death benefit for estate duty and CGT such that the taxpayer’s death benefit reductions would be reduced by the quantum of any allowances available or utilised during the taxpayer’s lifetime.

National Treasury has been urged to consider the possibility of extending the deeming provisions of section 3(3)(d) of the Estate duty Act to contain deeming provisions such that where an interest-free loan is made available by a person to a trust, the assets attributable to that loan should be included in the deceased’s estate for estate duty purposes. This is in addition to the recent proposal that where a funder makes an interest-free loan available to a trust, the funder be subject to donations tax thereon using the official rate of interest, currently 8% per year.

SARS has been urged to examine all trusts on registration and to investigate the transfer of assets into trusts to ensure the reduction of aggressive tax planning and to provide a level of assurance to taxpayers that their affairs are in order. The DTC proposed that donors and beneficiaries of all vested trusts should be subject to strict disclosure requirements and enforcement measures.

The DTC also recommended that SARS should concentrate on the examination of any trusts in which a deceased person may have enjoyed a vested interest thereby ensuring that all income and capital has been brought to account for both income tax estate and estate duty purposes.

Insofar as the taxation of discretionary trusts is concerned the DTC has recommended that the revenue income must be taxed in the trust in accordance with the definition of the gross income definition contained in section 1 of the Income Tax Act and  that capital gains realised by the discretionary trust should be taxed in the hands of the trust itself prior to those assets or gains vesting in the beneficiary. The DTC agreed that the current flat rate of tax applicable to trusts should be retained and subject to adjustment in line with any changes made in the maximum personal income tax rate.

The DTC recommended that SARS should establish a separate investigations unit to thoroughly comprehensively examine foreign trust arrangements.

The DTC recommended that the estates with a net value of less that R15 000 000 should be exempt from estate duty and that the estates with a value exceeding R15 000 000 should be subject to estate duty at a progressive rate. The report proposes that SARS should establish comprehensive records of all bare dominium and trust arrangements utilised for estate duty purposes and that all holders of a part interests in property should be required to submit tax returns regardless of their income derived.

As indicated above the DTC proposes that where an interest- free loan is made available to a trust the deeming provisions of section 3(3)(d) of the Estate Duty Act should be amended to include deeming provisions such that the asset acquired by the trust as a result of an interest-free loan should be added to the estate when the funder passes away. This would ensure that the interest-free loan no longer confers an estate duty advantage on the funder as a result of the deeming provisions set out in section 3(3)(d) of the Estate Duty Act.

The DTC 

  • considers that the inclusion of a general anti-avoidance rule in the Estate Duty Act has little prospect of success and therefore does not propose such a measure
  • has advised that it will conduct a further investigation into the implementation of wealth taxes in South Africa and that this will be dealt with in a separate report to be compiled by the DTC.
  • did not agree with proposals that trusts should be regarded as corporates for tax purposes as that would mean that trusts would be liable to tax 28% without being subject to dividends tax as is the case with a company. 
  • therefore recommended that the flat rate of tax applicable to trusts be retained at the current level but subject to adjustment from time to time in accordance with any changes made in the personal income tax rate.
  • identified various issues relating to the treatment of foreign trusts and particularly the consequences of paragraph 80 of the Eighth Schedule and section 25B of the Income Tax Act. 
  • recommended that SARS and National Treasury review the legislation applicable to foreign trusts to address the deficiencies noted in the DTC’ s report.

Furthermore, the DTC points out that many  foreign trust arrangements may in fact be managed from South Africa and as a consequence constitute South African resident taxpayers. Thus, taxpayers with foreign trust arrangements need to ensure that those are properly managed abroad and cannot be said to be tax resident in South Africa.

The DTC recommended that offshore retirement funds be further investigated by SARS to establish the nature of those funds and whether the South African resident contributing to such funds has made a donation to that fund. 

The concerns raised by the DTC in this regard relate to the non-payment of donations tax and investments made into the offshore retirement fund and that upon the taxpayer’s death the accumulated investment would not appear to be required to be included in the South African taxpayer’s estate on the basis that no vested right exists in respect of the trust’s accumulated capital income of the foreign trust.

In conclusion, it must be noted that the DTC makes recommendations to the Minister of Finance who will take into account the DTC’s report and will make any appropriate announcements in the course of the normal budget and legislative process. 

Thus, as is the case with all tax policy proposals they will be subject to the normal consultative processes and parliamentary oversight once announced by the Minister but that does not mean that the DTC is entitled to make firm policy proposals which must be accepted by government.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, October 2016. Image purchased www.iStock.com ©iStock.com/"Senior couple checking their accounts at home" by Troels Graugaard 

Monday, 12 September 2016

Last Chance to Regularise Foreign Assets not known to SARS and South African Reserve Bank

During the course of the 2016 Budget Review the Minister of Finance announced a last opportunity for those South Africans holding funds abroad which are not known to the South African Revenue Service or the South African Reserve Bank to regularise those assets. 

A revised Draft Bill regulating the Special Voluntary Disclosure programme (“SVDP”) was published on 20 July and that Bill is fast approaching finalisation. On 13 July the South African Reserve Bank issued a comprehensive circular dealing with the Exchange Control aspects of the SVDP.

It must be remembered that the Tax Administration Act No 28 of 2011 currently contains the so-called Permanent Voluntary Disclosure Programme (“Permanent VDP”) which does not contain any date by which an application must be lodged. 

Those taxpayers wishing to regularise their foreign assets will need to evaluate whether to do so utilising the Permanent VDP or SVDP as the methodology for submitting and applications is quite different. The SVDP will commence on 1 October 2016 and will terminate on 31 March 2017.

The revised Draft Bill makes it clear that the amounts of receipts and accruals not previously declared to SARS as required by the Income Tax Act No 58 of 1962 (‘the Act”) or the Estate Duty Act for tax purposes, excluding employees’ tax purposes, held outside during the period 1 March 2010 to 28 February 2015 will be exempt from tax. 

Thus, no donations tax, estate duty or income tax will be payable on the undeclared foreign assets up to 28 February 2015. Clearly with effect from 1 March 2015 taxpayers must account for income tax on income received on the foreign assets and donations tax on assets donated thereafter. Furthermore, they will be subject to estate duty where the person holding the foreign assets passes away after 1 March 2015.

Any person who held a foreign asset wholly or partly derived from receipts and accruals not previously declared to SARS as required by the Act or the Estate Duty Act, which was disposed of before 1 March 2010, other than by way of donation or disposal on loan account to a Trust may elect that the asset is deemed to have been held for the period 1 March 2010 to 28 February 2015 on the basis that the value for the period in question will be equal to its highest value whilst actually held by the applicant. If the applicant is unable to establish the amount with certainty SARS may agree to accept a reasonable estimate of that value from the taxpayer.

The revised Draft Bill requires that an applicant must include in their taxable income in the 2015 tax year an amount equal to 50% of the highest amount determined in respect of the aggregate value of all foreign assets referred to above as at the end of each year of assessment ending on or after 1 March 2010 but not ending on or after March 2015. 

Thus, taxpayers will need to determine the market value of all foreign assets held, not previously declared to SARS and to convert the foreign market value into Rands at the spot rate at the end of each year of assessment.

Assume that a taxpayer held foreign assets on which foreign income such as interests, dividends and capital gains had not previously been reported to SARS for the tax year set out below:

Year of Assessment
Market Value of foreign assets in Rands
28 February 2011
R1 000 000
29 February 2012
R1 200 000
28 February 2013
R1 500 000
28 February 2014
R1 600 000
28 February 2015
R1 400 000

By virtue of the fact that the market value of the foreign assets at 28 February 2014 was the highest in the amount of R1 600 000, 50% thereof, that is, R800 000 will be added to the taxpayer’s income in the 2015 tax year and taxed at that person’s marginal rate for that year which in most cases will be 41%. The tax charge will therefore amount to R 328 000. Interest will no doubt be payable from 1 September 2015 until the date on which the tax is paid.

The Draft Bill deals with foreign trusts whereby either the donor or the deceased’s estate of the donor or a beneficiary of a foreign trust may elect that any asset located outside South Africa which was held by the discretionary trust from 1 March 2010 to 28 February 2015 will be regarded as being held by that person for purposes of all tax Acts. 


2016/2017 Voluntary Disclosure Programme is the last chance to regularise 
foreign assets unknown to SARS and the South African Reserve Bank
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"Global shares investment flow chart concept" by 
Courtney Keating
As a result the foreign assets owned by the foreign trusts will be regarded as forming part of the estate of the applicant for purposes of Estate Duty upon their death. The election available for foreign trusts applies in respect of foreign assets where such assets were acquired by the foreign trust by way of a donation and which has been wholly or partly derived from any amount not declared to SARS as required by the Estate Duty Act or the Act.

Prospective applicants need to ascertain market values of foreign assets held at the end of February of each year for 2011 to 2015 so that they may ascertain which value was the highest in the five years in question. 

Where a person applies for SVDP no understatement penalties will be imposed and SARS will not pursue a criminal prosecution for a tax offence when application under the SVDP is successful.

Where a person holds assets contrary to the Exchange Control Regulations they may apply for relief from 1 October 2016 until 31 March 2017. 

It has been proposed that applications for Exchange Control relief will be filed electronically utilising the SARS e-filing system. For Exchange Control Relief the applicant must hold the foreign assets on or before 29 February 2016 and application for relief must be made within the prescribed period.  

The applicant is required to make full disclosure of all unauthorised foreign assets in which the applicant stipulates the source of all unauthorised foreign assets and includes details of the manner in which such assets where transferred and retained abroad. 

To submit an application for Exchange Control relief the applicant must submit proof of the market value of the foreign asset as at 29 February 2016 as well as a description of the identifying characteristics and location of such foreign asset supported by a valuation certificate by valuator the country where the foreign authorised asset is located. 

Furthermore, the applicant must submit a sworn affidavit or sworn declaration setting out details of the contravention. The Financial Surveillance Department of the SARB has indicated that a levy of 5 % will be payable on the value of the unauthorised foreign assets where those assets are repatriated to South Africa. 

The 5% levy must be paid from foreign sourced funds. If the applicant chooses to retain the foreign assets abroad, a levy of 10% is required to be paid and that must be sourced from foreign sourced funds. Where, however, the applicant is unable to pay the 10% levy from foreign sourced funds because the foreign assets are illiquid, the levy may be increased to an amount of 12% of the value of the unauthorised foreign assets.

Applicants will need to ascertain the nature of the funds held abroad and whether those funds are held contrary to the Exchange Control Regulations in which cases the levy referred to above will be payable. 

Where the foreign funds relate to technical violations of Exchange Control Regulations such that the applicant failed to declare foreign earnings or foreign inheritances a disclosure should be made to the applicant’s authorised dealer and in most cases no levy will be required to be paid. 

Furthermore, those persons who immigrated to South Africa and who failed to place their foreign assets on record upon their immigration can now do so without attracting any levy and can retain the assets abroad which they held prior to immigration to South Africa.

In summary, those taxpayers holding assets in contravention of either the Exchange Control Regulations or income tax provisions are encouraged to apply for VDP relief and will need to evaluate whether to apply for relief under the Permanent VDP or SVDP. 

It is important to remember that applications must be submitted during the period 1 October 2016 to 31 March 2017.



Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, September 2016


Saturday, 27 August 2016

2016 Special Voluntary Disclosure Programme: Tax and Exchange Control Relief

IMPORTANT NOTICE: 
This is a primary article on the Special VDP, and must be read together 
with the article detailing the changes tabled by the Minister of Finance on 26 October 2016 

Updated 19 October 2016

The last opportunity to come clean
            
Introduction

During the course of the February 2016 National Budget presented to Parliament, the Minister of Finance announced a last opportunity for those South African resident taxpayers holding funds abroad which are not known to the South African Revenue Service or the South African Reserve Bank to regularise those assets. Draft legislation was released during February and a subsequent draft was released during the course of April for public comment and on 20 July the National Treasury released a further revised draft of the legislation dealing with the income tax aspects of the Special Voluntary Disclosure Programme (“SVDP”). Furthermore, on 13 July the South African Reserve Bank issued a Circular dealing with the exchange control aspects of the SVDP.

 On 7 September the National Treasury announced further changes to the SVDP which are dealt with below.

It is important for those prospective applicants to be aware of the implications and requirements relating to the SVDP and indeed whether that VDP is suited to their needs as opposed to the existing current Permanent Voluntary Disclosure Programme (“Permanent VDP”) contained in the Tax Administration Act No 28 of 2011 (“TAA”)

Before turning to the specific details contained in the draft SVDP legislation and Exchange Control Circular it is worthwhile setting out the requirements for the Permanent VDP contained in the TAA. Applicants need to weigh up whether the SVDP is preferable to applying under the current rules set out in the Permanent VDP. Generally the SVDP may be the preferred option but where the tax default relates to the non-disclosure, for a limited period, of foreign income derived by the taxpayer the Permanent VDP may be less costly. It depends on the applicant’s particular facts and circumstances.

Permanent VDP contained in the Tax Administration Act

The Permanent VDP came into force on 1 October 2012, which is the date on which the TAA took effect. It must be noted that the Permanent VDP does not have a termination date and is thus open-ended and will exist so long as the provisions are contained in the TAA.

To qualify for relief under the Permanent VDP a person may apply, whether in a personal, representative, withholding or other capacity for VDP relief unless that person is aware of a pending audit or investigation into the affairs of the person seeking relief or an investigation or audit which has commenced has not yet been concluded.

The law allows for SARS to direct that even though a person may be under an audit or investigation they may still apply for VDP relief where the default in respect of which a person wishes to apply for VDP relief would not otherwise have been identified during the audit or investigation and the application for Voluntary Disclosure relief is in the interest of good management of the tax system and the best use of SARS resources.

It must be remembered that a person is deemed to be aware of a pending audit or investigation if a representative of the prospective applicant, or in the case of a company, an officer or shareholder or member thereof has become aware of the audit or an investigation, or that the audit or investigation has commenced.

To apply for VDP relief under the TAA it is essential that the prospective applicant has committed a default which comprises the submission of inaccurate or incomplete information to SARS or has failed to submit information or has adopted a tax position where such submission, non-submission or adoption of a tax position resulted in the taxpayer not being assessed for the correct amount of tax or the correct amount of tax was not paid by the taxpayer or the taxpayer received a refund which they should not have received.

Section 227 of the TAA specifies the requirements for Permanent VDP relief and those are that the disclosure made by the prospective applicant must:

·         be voluntary;
·         involve a default which has not previously been disclosed by the prospective applicant;
·         be full and complete in all material respects;
·         involve the potential imposition of an understatement penalty  in respect of the default;
·         not result in a refund due by SARS and
·         be made in the prescribed form and manner.

It must be noted that SARS requires the prospective of applicant to make a full and proper disclosure of defaults committed by the prospective applicant. It must be remembered that South Africa migrated to a worldwide or residence tax system with effect from 1 March 2001, which is with effect from the 2002 tax year. Thus, where a person holds foreign assets and they have failed to declare the foreign income derived on those assets SARS will insist that the income and capital gains relating to those foreign assets are disclosed with effect from 1 March 2001. 

It must be pointed out that the income tax on the previously undisclosed foreign income will always remain payable together with interest thereon which can become significant particularly where the default goes back to the 2002 tax year. It must be noted that the Permanent VDP does not contain any cut-off period relieving prospective applicants from making disclosure regarding prior tax years. Thus, prospective applicants cannot only make disclosure for the last five years but are required to make full and proper disclosure going back to when the default first occurred, which could be as long ago as 1 March 2001.

The advantages of applying for VDP relief under the Permanent VDP and pursuant to the conclusion of a voluntary disclosure agreement are the following:

·         no criminal prosecution for any tax offence relating to the default committed by the prospective applicant;
·         in most cases the waiver of any understatement penalty that would otherwise have been imposed under the TAA.
·         100% relief in respect of an administrative non-compliance penalty that was or may have been imposed under Chapter 15 of the TAA or a penalty imposed under a tax Act, excluding a penalty imposed under that Chapter, or in terms of a tax Act for the late submission of a return. Thus, a penalty which would otherwise have been imposed for the late payment of any tax may be waived under the Permanent VDP.

The Permanent VDP contains a mechanism whereby a prospective applicant may seek a non-binding private opinion as to whether they qualify for relief under the TAA. Thus, prospective applicants may apply anonymously via the offices of a tax practitioner whether the person in question qualifies for VDP relief.

The prospective applicant will be required to be registered for e-filing as the application form for VDP purposes must be submitted utilizing e-filing. It will be necessary to quantify the amounts of income which previously should have been reflected and a covering letter is normally submitted together with the application motivating why the prospective applicant qualifies for the relief in question.Once the prospective applicant has filed the VDP application form they will receive confirmation of receipt from SARS which will then review the information submitted.

Thereafter SARS will require the taxpayer to complete the so-called VDP tax returns which amends the income tax returns previously submitted by the taxpayer. Once those returns have been submitted they will be assessed by SARS and those assessments will reflect the income tax and interest payable by the taxpayer pursuant to the VDP arrangement. 

To conclude the VDP process the taxpayer and SARS must conclude a Voluntary Disclosure agreement as envisaged in the TAA. The agreements utilised by SARS must comply with the provisions of the TAA setting out the material facts of the default on which the Voluntary Disclosure relief is based as well as the amount of tax payable by the person which must separately reflect the understatement penalty which would otherwise have been payable as well as arrangements and dates of payment and any other relevant undertakings made by the taxpayer and SARS.

SARS is entitled to withdraw the Voluntary Disclosure relief if it subsequently discovers after conclusion of the Voluntary Disclosure agreement that the applicant failed to disclose a matter that was material for making a Voluntary Disclosure under the TAA. In such a case the relief that was granted under the VDP rules will be withdrawn and any amount paid will constitute part payment of any additional tax debt which may arise in respect of the defaults disclosed and furthermore, the taxpayer may be pursued criminally. Furthermore, SARS is compelled to issue assessments to give effect to the Voluntary Disclosure agreement concluded by the taxpayer and SARS.

Special VDP – tax aspects

On 20 July National Treasury issue a media statement dealing with the revised draft tax bills which will regulate the SVDP. The SVDP is contained in the Rates And Monetary Amounts And Amendments of the Revenue Laws Bill as well as the Rates And Monetary Amounts And Amendment of Revenue Laws (Administration) Bill. The public had until 8 August time in which to make further representations regarding the legislation but in principle it does not appear that further significant changes will be made at this late stage taking account of the fact that the SVDP is intended to commence on 1 October 2016 and proposed to terminate on 30 June 2017.

The income tax aspects of the SVDP are primarily contained in the Rates And Monetary Amounts And Amendment of the Revenue Laws Bill at part 2 thereof, namely clauses 14 – 17.

It is specifically provided that the SVDP will include a trust as defined in section 1 of the Income Tax Act (“the Act”) and will include any similar arrangement formed or established under the laws of any foreign country.

Clause 15 of the revised draft bill provides that the amount of receipts and accruals not previously declared to SARS as required by the Act or the Estate Duty Act for tax purposes, excluding for employees’ tax purposes, held outside South Africa during the period 1 March 2010 to 28 February 2015 will be exempt from tax. Thus no donations tax, estate duty or income tax will be payable on the undeclared foreign assets up to 28 February 2015. From 1 March 2015 taxpayers must account for income tax on the foreign assets and donations tax on assets donated thereafter. In addition, they will be subject to estate duty where the person holding the foreign assets passes away after 1 March 2015.

Any person who held an asset wholly or partly derived from receipts and accruals not previously declared to SARS as required by the Act or the Estate Duty Act which was disposed of before 1 March 2010, other than by way of a  donation or disposal on loan account to a trust may elect that the asset is deemed to have been held for the period 1 March 2010 to 28 February 2015 on the basis that the value for the period in question will be equal to its highest value whilst actually held by the applicant. Where the applicant is unable to establish the amount with certainty SARS may agree to accept a reasonable estimate of that value from the taxpayer.

Clause 16 of the revised draft bill provides that an applicant must include in their taxable income in the first year of assessment ending on or after 1 March 2014, that is in the 2015 tax year an amount equal to 50% of the highest amount determined in respect of the aggregate value of all foreign assets referred to above, as at the end of each year of assessment ending on or after 1 March 2010 but not ending on or after 1 March 2015. National Treasury has proposed that the 50% inclusion rate be reduced to 40%.

It will therefore be necessary for taxpayers to ascertain the market value of all foreign assets held, not previously declared to SARS and to convert the foreign market value into Rands at the spot rate at the end of each year of assessment. SARS publishes the rates of exchange which should be used for these purposes.
One requirement for relief under the SVDP for exchange control is that 
the unauthorised  foreign assets for which administrative relief is required were held 
by the applicant on or before 29 February 2016
 Image purchased from www.iStock.com ©iStock.com/
"International currencies on businessman's hand" illustration by shutter_m 
Assume a taxpayer held foreign assets on which foreign income such as interest and dividends and capital gains had not previously been reported to SARS for the tax years set out below:

Year of assessment
Market Value of foreign assets in Rands
28 February 2011
R1  000 000
29 February 2012
R1  200 000
28 February 2013
R1  500 000
28 February 2014
R1 600 000
28 February 2015
R1 400 000

By virtue of the fact that the market value of the foreign assets at 28 February 2014 was the highest in the amount of R1 600 000, 40% thereof, that is, R640 000 will be added to the taxpayer’s income in the 2015 tax year and taxed at the person’s marginal rate for that year which in most cases will be 41%. The tax charge will therefore amount to R262 400. Interest will no doubt be payable from 1 October 2015 until the date on which the tax is paid.

The draft legislation deals with foreign trusts whereby either a donor or the deceased estate of the donor or a beneficiary may elect that any asset located outside South Africa which was held by the discretionary trust from 1 March 2010 to 28 February 2015 be regarded as having been held by that applicant for purposes of all tax acts.

This means that the assets owned by the foreign trust will be regarded as forming part of the estate of the applicant for purposes of estate duty upon their death. The election available for foreign trusts applies in respect of foreign assets where such assets were acquired by the foreign trust by way of a donation and has been wholly or partly derived from any amount not declared to SARS as required by the Estate Duty Act or the Act and has not vested in any beneficiary of the foreign trust at the time that the election is made.

The legislation provides that where a person makes the election in respect of a foreign trust that person is deemed to hold the asset in question from the date on which the foreign trust acquired the asset and to have received  the same income and incurred the same expenditure in respect of the foreign asset which was received by the trust and deemed to have dealt with the asset in the same manner as dealt with by the trust. 

The deeming provisions set out in the draft bill operate until the asset is disposed of by the trust or alternatively the person would be treated as having disposed of the asset under the Act or in the case of a deceased estate, company or other juristic person the day before the person ceases to exist by operation of law. Where the deeming provisions cease to apply the applicant is regarded as having disposed of the foreign asset for consideration equal to the market value of that asset on the date of disposal. The draft legislation makes it clear that the deeming provisions set out in section 7(5), section 7(8) and 25B of the Act and the equivalent rules for capital gains, namely, paragraphs 70, 72 and 80 of the Eighth Schedule to the Act will not apply in respect of any income or expenditure or capital gain during the time that the asset is deemed to be held by the applicant.

Prospective applicants must obtain details of market values of the foreign assets held by them as at the end of February of each year for 2011 to 2015 so that they may undertake the calculation required under the draft legislation. Where, for example, a person received an inheritance from a deceased relative abroad and failed to declare the income derived therefrom over many years it would appear that should that person apply for SVDP relief they will be required to disclose the full amount of the market value of the assets such that the highest market value thereof in the five year period will be subject to tax on the basis that 40% thereof will be included in the applicant’s income in 2015. 

There is therefore unfortunately an element of double taxation that may arise in certain cases or the taxation of amounts which should in principle not be taxed where applicants choose to apply for relief under the SVDP. This is on the basis that the draft bill does not permit an applicant to apportion the foreign asset into its constituent parts of those amounts which may be inherently non-taxable and that which is income and thus taxable. An applicant must determine whether SVDP or the Permanent VDP is more appropriate in their particular circumstances.

It must be noted that any non-compliance in regard to value-added tax, employees’ tax, unemployment insurance fund contributions and skills development levies do not fall into the SVDP and relief for penalties relating to these taxes would need to be applied for under the Permanent VDP referred to above.

The SVDP will commence on 1 October 2016 and applications are required to be lodged no later than 30 June 2017. The application process for the existing Permanent VDP will be extended to the SVDP.

Applicants may also apply to SARS for a non-binding opinion on the same basis as the Permanent VDP.

As in the case of the Permanent VDP a person will not be able to apply for the SVDP if they are aware of a pending audit or investigation in respect of their foreign assets. Where the audit relates to domestic assets they would still qualify for relief under the SVDP.

No understatement penalties will be imposed and SARS will not pursue a criminal prosecution for a tax offence where an application under the SVDP is successful.

The Rates And Monetary Amounts And Amendment of Revenue Laws (Administration) Bill of 2016 makes it clear that in all cases the understatement penalty will be reduced to nil where a person applies for SVDP relief. Under the Permanent VDP there was a risk, depending on the circumstances, that the taxpayer may face a penalty of 5% or 10 % where SARS believes that the taxpayer was guilty of gross negligence or intentional tax evasion. However, in all cases applicants for SVDP will not on any basis face an understatement penalty.

Exchange Control aspects of the SVDP

The Financial Surveillance Department of the South African Reserve Bank (“FinSurv) has confirmed that persons who wish to regularise any foreign assets held in contravention of the Exchange Control Regulations may apply for relief from 1 October 2016 until 30 June 2017. It is intended that the applications for exchange control relief will be filed electronically utilising the SARS e-filing system. 

The requirements for relief under the SVDP for exchange control are as follows:

§  the unauthorised  foreign assets for which administrative relief is required was held by the applicant on before 29 February 2016;
§  applications are made within the prescribed period;
§  the declaration made by the applicant is made voluntarily;
§  the applicant makes full disclosure of all unauthorised foreign assets in which the applicant stipulates the source of all unauthorised foreign assets and includes details of the manner in which such assets were transferred and retained abroad;
§  the applicant furnishes all documentation of information stipulated in the SVDP application form which information and documentation includes, but is not limited to:

¨       the market value as at 29 February 2016 of the unauthorised foreign asset in the foreign currency of the country of which the asset is located;
¨       a description of the identifying characteristics and location of such foreign asset;
¨       a valuation certificate by a valuator of the country where the unauthorised foreign asset is located or a valuation by a sphere of government where the asset is located or an original certified statement of account reflecting the balance or market value or any other form of proof of value of that foreign asset as the Treasury may on good cause shown allow to be submitted, and
¨       a sworn affidavit or solemn declaration of the contravention.
§  the applicant furnishes any additional information relating to the unauthorised foreign assets as may be required in terms of the SVDP.

The FinSurv has indicated that a levy of 5% will be payable on the value of the unauthorised foreign assets where the assets are repatriated to South Africa. The 5% levy is required to be paid from foreign sourced funds.

Where the applicant retains the foreign assets abroad, a levy of 10% is required to be paid and that must be sourced from foreign sourced funds.

Where the applicant does not pay the 10% levy from foreign sourced funds because the foreign assets are illiquid, the levy will be increased to an amount of 12% on the value of the unauthorised foreign assets.

It must be noted that the applicant will not be allowed to deduct the foreign investment allowance or any unutilised portion thereof from the leviable amount. The levy due is required to be paid within three months from the date of receipt of notification from FinSurv and in those cases where the 5% or 10 % levy is payable that levy must be repatriated to South Africa to an account held at a local Authorised Dealer, that is, a commercial bank, which must be converted in South Africa at the ruling exchange rate.

Once the applicant’s bank has received the payment of the levy they will be required to pay that over to an account held at the Corporation for Public Deposits.

The SVDP exchange control circular deals with foreign assets held in contravention of the exchange control Regulations and especially those arising from the sale, cession or assignment by residents of intellectual property owned or developed by South African residents without first having obtained the approval of the FinSurv. In these cases disclosure of the sale or assignment of intellectual property will be required including the identity of the parties involved and details of royalties paid by residents pursuant to any disposal of intellectual property.

 In addition, where an applicant has incurred foreign liabilities to acquire foreign assets with recourse to South Africa without having obtained the obtained the requisite approval, disclosure of the underlying transactions relating to the liability will be required, including details of the liability itself for the parties involved. Finally, the acquisition of a direct or indirect interest in a foreign asset, including foreign cash balances as a result of foreign funds abroad which should have been repatriated to South Africa or having remitted funds from the country without prior approval fall into the SVDP for exchange control purposes. 

This will include the acquisition of foreign securities, the retention abroad of export proceeds, unauthorised spending on credit cards resulting in foreign assets and inheritances from South African deceased estates with unauthorised foreign assets. In these cases disclosure of the transaction including any underlying transactions are required to be provided. Where a South African has reinvested foreign assets into South Africa via a so-called loop structure or 74-26 structure those may also be unwound utilising the SVDP for exchange control purposes.

Thus, where, for example, a South African resident has disposed of shares that they held in a domestic company to a foreign trust of which they are a beneficiary, that will be regarded as a loop and that structure is required to be unwound with a levy being payable to the FinSurv.

The FinSurv also sets out the rules relating to donors of funds to foreign discretionary trusts which are very similar to the rules relating to the tax aspects of the SVDP.

In such a case the applicant is deemed to hold the foreign assets owned by the foreign trust for purposes of the administrative relief available under the exchange control aspects of the SVDP and will be required to submit a copy of the trust deed to the authorities. The levy payable amounts to 5% or 10 % of the value of the foreign assets as at 29 February 2016.

The Circular issued by South African Reserve Bank sets out the procedures to follow in the case of those applicants who are dissatisfied with any decision made under the process.

The Exchange Control Circular also deals with administrative relief available outside of the SVDP. The authorities make it clear that in many cases foreign assets falling into the categories dealt with below will not generally attract any levy but merely requires disclosure being made to an Authorised Dealer. 

The disclosure must include confirmation of the source of the unauthorised foreign assets, details of the manner in which such assets were transferred and retained abroad as well as proof of the market value of the unauthorised assets at 29 February 2016. 

The categories of foreign assets dealt with relate to those persons who have immigrated to South Africa and who failed to declare their foreign assets upon immigration to an Authorised Dealer. 

The SVDP allows such immigrants to now place on record their foreign assets before 31 March 2017 thereby regularising the qualifying residents’ possession and retention abroad of the foreign assets concerned.

Where a resident became entitled to a foreign inheritance from a bona fide non-resident estate, which excludes South African estates with foreign assets, before 17 March 1998 they were required to declare those foreign assets to an Authorised Dealer for consent to hold the assets abroad. 

Those persons who have not yet done so may now regularise those assets by way of declaration to an Authorised Dealer.

The Circular also deals with those cases of South African residents who became entitled to a foreign inheritance from the estate of another South African resident where those assets were held in compliance with the Exchange Control Regulations.

Such persons may declare those foreign assets and apply for exemption from the provisions of the Regulations in question. The FinSurv  will allow the assets to be retained abroad subject to the condition that those assets are not placed at the disposal of any other resident or used to create loop structures and no levy will be payable by the resident beneficiary. In the event that the foreign assets inherited by the resident were held by the deceased in a manner contrary to the Exchange Control Regulations they must be reported to an Authorised Dealer who would require the assets to be repatriated and such a case no levy would be payable. If, the decision is made to retain the assets abroad the levy of 10 % will be payable.

Furthermore, the Circular also deals with foreign income which was required to be reported to the authorities where such income was generated prior to 1 July 1997 for permission to retain the funds abroad. All that is required in such a case would be a declaration which would regularise the qualifying resident’s possession and retention abroad of the foreign assets.

The exchange control Circular dealing with the SVDP also deals with contraventions which may have taken place by corporate entities regarding approved foreign investments and may have failed to comply with procedural requirements. Where corporate entities failed to supply the authorities with financial statements and progress reports regarding the proof of investment and other technical violations have incurred, they will be required to submit the outstanding information and in most cases no levy will become payable.

Those South African residents who do not apply for administrative relief under the SVDP and then make a full and frank and verifiable disclosure to FinSurv will be required to pay a settlement amount ranging from 10 % to 40 % of the then current market value of unauthorised foreign assets. Those persons who choose not to apply for SVDP relief nor voluntarily approach FinSurv for assistance to regularise their affairs  will face the full force of the law in which case FinSurv may recover the full amount of the contravention as a penalty from the person in question.

Conclusion

Those taxpayers holding assets in contravention of either the income tax or exchange control rules are encouraged to apply for VDP relief and need to evaluate whether to apply for relief under the Permanent VDP or SVDP. This decision will depend on the person’s particular circumstances and advice should be obtained from ENSafrica in this regard thereby ensuring the applicant enjoys legal professional privilege.

The relief available from the South African Reserve Bank is reasonable and requires payment of a levy of either 5% in the case of assets returned to South Africa or 10 % where the applicant chooses to retain the assets abroad. It is important that applicants start obtaining the required information as the timeframe to submit application is short, namely nine months from 1 October 2016 to 30 June 2017.

It is important that applicants start obtaining the required information as the timeframe to submit application is short, namely 9 months from 1 October 2016 to 30 June 2017.

Dr Beric Croome 
Tax Executive
ENSafrica