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Wrong Forecasts
At the time the Amnesty Act was introduced and because of it I predicted that Exchange Control would be abolished once its provisions had been implemented. Attracting capital to SA was the new imperative and Exchange Control was not conducive to this. Major inflows since then including Barclays and Vodafone have put paid to this, apart from the recent pat on the back by Johann Rupert. Even were Exchange Control to be abolished, this would not affect tax the position of anyone making incomplete returns to SARS of foreign income. I do not think the aspect has been fully understood by non-amnestied resident investors awaiting the abolition of Exchange Control.
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But Still Half Right
Again when I spoke last year, and indeed the year before, I suggested that to all intents and purposes Exchange Control had been relaxed to the point of extinction in that anyone/or family can exit with R2m/R5m. This is really more than the average person/family possesses. In addition, individuals are now entitled to take out an additional R500 000 a year without a tax clearance relating to monetary gifts, loans, maintenance, or a greater travel allowance. Obviously the financial surveillance department will exercise prudential scrutiny over the use of this facility, but to my mind it is a rather mixed pudding. Residents are now told that while all the restrictions remain, for certain specific purposes an additional amount can be taken offshore annually. The point being that other than for genuine increased costs of accommodation/travelling, the only purpose most people would wish to take advantage of this additional amount, would be in order to invest offshore. That of course is illegal.
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Exchange Control Coerces Emigration
3.1 The continuation of Exchange Control is partly to blame for the present brain-drain in South Africa. I have had numerous clients coming to me to ask should we “emigrate or just leave”. The motive for the most part is out of concern to safeguard the wealth they have accumulated in South Africa. I have pointed out that under the present dispensation residents are entitled to invest in fixed property in SADC member countries. The dream of a farm in Tanzania or beach cottage in Mauritius or Mozambique has a distinctive allure. Likewise small and medium sized companies, are entitled to make new outward foreign direct investments outside the CMA, not exceeding R50m per Company per calendar year, without prior approval of exchange control. This is a massive advance and I have suggested to clients that rather than emigrate, it would make much more sense for them to invest offshore via the entrepreneurial Company they have built up in one of the SADC countries, or wherever. For whatever reason this approach has had limited appeal. Most are concerned that the 10% levy on expatriating monies in excess of R5m will be withdrawn and that the value of the Rand will deteriorate over time. In the result, substantial monies have left South Africa in recent months as a result of the Eskom factor and other political considerations. If there was an unrestricted right to transfer monies, I do not believe that this Afro-pessimism would succeed.
3.2 It seems to me that outside the CMA it must become extraordinarily difficult to police compliance with investment monies exited. In particular, if the resident investor leaves South Africa the power to deal with such investment offshore is difficult, if not impossible to constrain. It will certainly bring a host of administrative problems in its wake.
3.3 In regard to the 10% levy it appears that although regulations only require at best actual departure, the approach adopted is that no expatriation of monies will be allowed until permanent resident status in a foreign jurisdiction is obtained. This of course can delay the process for months, if not years, with the consequent possible exchange losses.
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Further Entitlement
4.1 A little known amendment reflected by the Taxation Laws Amendment Act No. 3 of 2008 is the amendment to the definition of a Retirement Annuity Fund, whereby under paragraph (x) “A member who discontinues his or her contributions prior to his or her retirement date, shall be entitled to (dd) the payment of a lump sum benefit contemplated in paragraph 2(b)(ii) of the 2nd Schedule, where that member emigrated from the Republic…” The intention behind this is that where a person emigrates before he reaches retirement ie 55 years of age, he can access the entire RA Fund less normal income tax and expatriate it as part of his emigration allowance or blocked Rand levied withdrawal. The position previously was that such a person having emigrated would only be entitled on turning 55 to receive one third in cash and the balance as an annuity. This may have further consequence for some hundreds of thousands of South Africans who have stopped contributed to RA's, but not emigrated, and who have not yet turned 55! ie even though they may have lived overseas for 40 years and now be 60 years old, they may still be entitled to cash up and extract the full amount.
4.2 A static aspect has been that the sum of R30 000, which a resident is entitled to donate offshore has not been increased since it was introduced many years ago. This is strange taking into account the increases in allowances otherwise seen and in particular that up to R100 000 is now donations tax exempt. One would have thought the figure of R30 000 would more or less follow that exemption.
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Trusts
5.1 Insofar as Testamentary Trusts are concerned, cash bequests and proceeds of legacies and testamentary trusts due to non-resident beneficiaries provided the non-resident heir has formally emigrated can be remitted abroad.
5.2 Different criteria apply to Intervivos Trusts. If the founder or funder of the trust dies then the capital can be remitted without restriction to non-resident beneficiaries and emigrants. But, if a third party has funded the trust, only income earned on the capital can be sent offshore provided the funding is in place at least three years before the beneficiary emigrated. If the beneficiary was the third party funder of the trust and then emigrates, the capital cannot be remitted until the death of that emigrant beneficiary.
5.2 It is to be noted that the 8th Schedule does not provide for a Capital Gain to be distributed to a non-resident and the gain is taxed at 20% in the Trust's hands. Thus if the monies received from the sale of an asset are distributed to a non-resident beneficiary the rather strange situation can occur that the trust at the same time distributes a Capital Gain to a resident beneficiary and obtains that beneficiaries marginal tax rate for Capital Gain purposes. Of course if the non-resident wants to lend the very money that he or she has received to allow the resident beneficiary to pay the book entry capital gain, a whole exchange control problem arises with loans to residents.
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Other Problems
6.1 There are five different types of residents from an Exchange Control point of view, one of them being the young man who leaves the country after graduating to see the world and for one reason or another doesn't return. He then, as you know, is treated as a resident, other than in respect of assets he may build up overseas, which are now not required to be reported to Exchange Control were he ever to return. However, it is interesting to note, and not many people have picked this up, that Section 56(1)(g)(iv) as from November 2005 has been deleted. This provision allowed for the donation by a resident of any monies obtained from a trade offshore, ie. employment, to be donated tax-free to any other person. Now however he/she will return to South Africa all those assets are firmly in his dutiable estate and cannot be donated should he return unless such donation takes place prior to returning to South Africa. The assets will fall within his estate and not be exempted in terms of Section 4(3) of the Estate Duty Act on the basis that as he was born in South Africa they are not assets acquired before becoming a resident for the first time in South Africa. The moral of the story is therefore to donate such assets, before becoming a resident in the Republic, to an offshore entity!
6.2 Again the young person who has for one reason or another not returned, will in the fullness of time inherit from his parents, until death residents in South Africa, and a whole emigration application has to be gone through before he is entitled to receive one cent as an heir, ie. because he is still a resident and not entitled to receive offshore assets without Exchange Control consent. However in terms of Circular D405, South African residents were entitled to receive foreign inheritances as of 17th of March 1998 and this approach was extended to residents inheriting from residents who had legal offshore assets! Thus, technically, our young man still being a resident but being in his fifties or older, should be entitled likewise to receive such money without further ado!
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The Weather
7.1 The next question I am asked by a client who has decided to emigrate is how soon can he come back and for how long can he stay, without losing his entitlement to leave monies offshore. An authorised dealer is entitled to provide up to R75 000 per year to an emigrant from blocked Rand for the various purposes set out in the manual. A person who has emigrated who resides in South Africa in excess of 3 months will probably be living on the precipice of exchange control ruling that his assets are to be repatriated in that he has returned to South Africa within a period of 5 years! Unfortunately, you can't have your cake and the weather.
7.2 In emigrating CGT occurs on the day before the date on which that person leaves the country, or becomes a non-resident. One can become a non-resident by change of intention, but from a practical point of view as one has to obtain a tax clearance certificate on emigration, payment would be required to be effected upfront of that Capital Gains Tax. This would exclude immovable property as an interest in immovable property (under paragraph 2) is taxable whether as a resident or non-resident on disposal. On disposal by a non-resident, section 35A provides for certain upfront withholding tax payments against the purchase price.
7.3 At this stage my client decides and says maybe he will just work offshore for a while as an entrepreneur and see how it goes. I point out to him that under section 10(o), he is only entitled to tax exemption in respect of income earned as an employee where he has left the country for a period in excess of 183 days over a 12 month period, and in excess of 60 days on a successive basis. At this stage he/she sighs and says, well maybe he/she will just stay put and keep his/her money invested on the JSE with the brilliant returns that have featured over the years. Little could we know about the meltdown that was about to hit us!
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Dividends
8.1 I have been intrigued by the position of the intended 10% dividend tax, which is set to replace STC. One of the factors that has apparently delayed the imposition of the new tax, which is nothing more than a withholding tax, is that most of the double tax conventions that South Africa has with foreign countries provide that South Africa is not entitled to withhold more than 5% of any dividend paid as a withholding tax. Most of the treaties also contain provisions to the effect that a contracting state cannot introduce legislation that disadvantages or discriminates as against residents of the other contracting state. Whether this will entitle a South African resident to complain that the provisions of the Double Tax Convention were being contravened in that residents of the other contracting state were obtaining a more beneficial rate than he/she is, is a moot point.
8.2 It was thus with considerable interest that I saw reference recently to the case of Volkswagen of South Africa (Pty) Ltd v SARS, which was a judgment handed down on 21st April 2008. VW had paid dividends to its holding Company in Germany over a period of time, deducting STC at 12.5% of R125m. They sued for repayment of R51m on the basis that Article 7 of the Double Tax Convention provided that dividends could only be taxed at the rate of 7.5%. The Court ruled that STC was not a tax on dividends, but on the profits of the Company declaring the dividends. This judgment may be technically correct, but the effect is certainly that the dividend is reduced by tax calculated on the actual dividend made, rather than on the profits of the Company as such.
8.3 Perhaps South African residents aware of this position will structure their holdings in South African Companies so that an offshore Company becomes the beneficial owner and entitled to the limitation of 5% on the dividend withholding tax. That dividend can then be channeled back to South Africa either via a CFC or alternatively, by reason of the exemption contained in Section 10(1)(k)(ii)(dd) in terms of which any South African shareholder holding 20% or more of a foreign Company is not required to treat a dividend from such Company as income. Alternatively the shares in the offshore Company can be held by an offshore Trust, and to the extent that local beneficiaries obtain dividends under 25B(2A), they in turn could rely on the provisions of the aforesaid section on the basis that the Trust is no more than a conduit pipe. The offshore Company would not be a CFC, despite being controlled by the Trust, because the Trust would be a non-resident Trust and thus any possible attack under the CFC provisions would be neatly sidestepped.
8.4 The point about this observation is that the more complicated tax laws get, the more unintended consequences pop out of the woodwork!
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Immigrants
9.1 Immigrants must declare that they are possessed of foreign assets and liabilities to an authorised dealer and give an undertaking that they will not make any of them available to South African residents. This is a rather bland requirement, achieving little.
9.2 After five years, immigrants to SA will be regarded as full residents for SA exchange control purposes but if they leave SA within five years, will be allowed to retransfer any funds brought into SA.
9.3 As of 1st July 1997, residents are entitled to repatriate any income earned abroad, or foreign capital introduced, subject to providing documentary evidence of such introduction. The consequence is that one can take out in Rand exactly what was brought in, together with the capital profits relating thereto. This may be difficult to prove, save for instance with immovable property. The effect with the decline in value of the Rand is not necessarily beneficial!
9.4 If a person has not formally emigrated from SA they are deemed to be residents by Exchange Control! However, if he/she has resided outside SA for more than five years he/she is then regarded as an immigrant on returning to SA. This category exists only for Exchange control purposes; i.e. their status as a tax resident would have changed on the day they left SA albeit as a student or back-packer. Until that person now living abroad whether for one year or thirty years formally emigrates he/she is not entitled to expatriate any monies form the SA other than normal allowances and in turn subject to their having resided in SA for portion of that year. Thus inheritances/donations cannot be remitted to such persons until such time as they formally apply to the authorities to emigrate!
ANDREW DUNCAN
Fiscal and Estate Planning Specialist
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