Taxman relents on investment allowance

DURING 1996, exchange control regulations were relaxed so that private individuals could invest certain sums of money abroad, subject to the requirement of obtaining a tax clearance certificate from the Commissioner: South African Revenue Service (SARS).

The amount which could be invested has been increased fairly regularly, and the so-called foreign investment allowance, whereby natural persons may invest offshore, is R4m per person per calendar year for taxpayers in good standing and over 18.

On June 28 this year, the financial surveillance department of the South African Reserve Bank (SARB) released Exchange Control Circular No. 8/2012, dealing with foreign investments which may be approved in respect of natural persons in excess of R4m.

The SARB has advised that private individuals wishing to invest more than R4m a year abroad must first approach the Commissioner for a tax clearance certificate in the prescribed format, which must then be submitted with their application to the financial surveillance department via their authorised dealer for consideration.

Natural persons wishing to diversify their investments by investing offshore
can now apply to invest amounts offshore without limit

Thus, those natural persons who wish to diversify their investments by investing offshore, are now entitled to apply for consent to invest amounts offshore without limit. It must be noted that the documentation released by SARB only refers to natural persons, and thus, it would appear that it is not possible for a South African trust to apply for permission to invest offshore.

At one stage, those persons who chose to emigrate from SA were allowed to remit certain amounts of capital from SA, and were required to pay a levy of 10% of the assets in excess of the specified threshold which they wished to export from SA. Under the new dispensation, SA residents can invest offshore without limit and without being required to pay any levy to the SARB.

It would appear that there is no limit for which an individual may apply to invest offshore, but that the SARB has a mandate to authorize transfers of up to R200m, and amounts in excess thereof will need to be approved by the National Treasury itself.

It must be remembered that those persons who utilise the dispensation to invest offshore may not utilise the funds transferred from South Africa to directly or indirectly acquire shares or other interests in a company located in the Common Monetary Area (CMA) or any other assets in the CMA. 

Furthermore, the funds transferred from SA may not be reintroduced from offshore as a loan to a resident in the CMA. If the funds are utilised in such a manner, that would be regarded as a so-called “loop”, which constitutes a violation of the exchange control regulations.

Residents who travel offshore may not use the unutilised portion of travel foreign allowances for foreign investment purposes. Such funds are required to be brought back to SA, and offered for sale to an authorized dealer in accordance with current regulations.

Thus, SA resident individuals may now invest unlimited amounts offshore, but are required to obtain a tax clearance certificate before applying for authorisation to remit the funds abroad. 

The applicant would need to apply for a tax clearance certificate at their local Receiver of Revenue, and, depending on the amount of the foreign investment, the application for the tax clearance certificate may be referred to the office of the Commissioner: SARS in Pretoria for approval. 

If the decision is made to utilize the dispensation to invest offshore, it is necessary to consider the nature of investment to be made abroad, as well as the tax consequences flowing therefrom.

Where the South African investor acquires income-producing assets abroad, it must be remembered that the income generated from those assets acquired under the foreign investment allowance remain taxable in SA, on the basis that SA now taxes its residents on a worldwide basis.

Thus, should the decision be made to acquire, for example, listed shares, the dividends received on those shares will, from April 1 2012, attract tax, but such tax will be restricted to the rate of 15%, in accordance with section 10B of the Income Tax Act.

As and when foreign shares are disposed of, the capital gains tax consequences relating thereto must not be overlooked, and the capital gain will attract tax in SA.

Furthermore, the assets acquired by the South African investor will form part of that person’s estate upon their death, and will be liable to estate duty.

Investors may wish to place the funds transferred from SA into an offshore structure, and it is important to take account of the fiscal consequences. South African residents who donate assets to, for example, a foreign trust, remain liable to donations tax at the rate of 20%. 

Thus, it is unattractive for a South African investor to utilise the foreign investment allowance and to donate those funds to a foreign trust.

Alternatively, where the South African resident advances the funds invested abroad to a foreign trust, a market-related interest must be charged on that loan, failing which the resident will be in violation of the transfer pricing rules contained in section 31, which has the effect of imputing interest received by the resident on the loan receivable from the foreign trust where a market related rate of interest is not charged.

If a decision is made to advance funds, for example, to a foreign trust, it is important that the trust is, in fact, managed from abroad, and that it cannot be said that the trust’s place of effective management is located in SA, which would result in the foreign trust becoming a South African taxpayer. 

The risk of a foreign trust becoming a tax resident of SA arises where the South African investor decides to become a trustee of the foreign trust, or exercises other powers which could result in the trust’s place of effective management being regarded as being located within SA. Caution therefore needs to be exercised when creating a foreign trust and the manner in which that trust is managed.

SA recently conducted a voluntary disclosure programme from 1 November 2010 31 to October 2011, whereby South African residents could regularise violations of the exchange control regulations with SARB and regularise defaults under the tax system with SARS. The Tax Administration Act contains a provision which, once that statute becomes operational, introduces a permanent voluntary disclosure programme, allowing for South African taxpayers to regularise their tax affairs where necessary.

Unfortunately, that legislation is not yet in place, and it remains to be seen when it will take effect. However, where South African residents have removed funds from SA in contravention of the exchange control regulations, and may have violated the tax laws of South Africa, they will, once the voluntary disclosure programme and the Tax Administration Act take effect, be entitled to approach the authorities to regularise their previous transgressions.

Those residents who chose to utilise the foreign investment allowance must remember that the income from the assets invested offshore remains fully taxable in SA, and must be properly disclosed for tax purposes in their tax return.

The fact that private individuals can now invest unlimited amounts offshore, means that exchange control has, for all practical purposes, largely been removed, insofar as natural persons resident in SA are concerned. It is unfortunate that South African trusts cannot currently also invest in assets located offshore.

■ Dr Beric Croome is a tax executive at Edward Nathan Sonnenbergs. This article first appeared in Business Day, Business Law and Tax Review (October 2012) Free image from ClipArt