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.
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