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

Image purchased from www.iStock.com ©iStock.com/
"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

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