Walkers Attorneys

The following survey is an outline of the applicability of Income Tax and Estate Duty liability for persons who are “non-residents” living in SA (SA) and who remain non residents or intend to become residents.

2.1. The critical determination is whether a person has become a resident. There are two tests to determine this for a natural person:

2.1.1. - If a person chooses SA as the place they want to live; i.e. they immigrate to SA and make an actual choice then on that basis they will become residents on the day they enter SA.

2.1.2. - If a person has entered SA and is residing in SA but is not sure whether they want to permanently reside, i.e. they are temporarily seconded to SA then the physical presence test applies which lays down that persons become residents for the tax year in question on the 92^nd day of the sixth year if they are physically present in SA for more than 91 days for each of the preceding five years but that altogether during the preceding 5 years that they have lived in SA for a total of 915 days. If they do not reside in SA for up to 91 days in each of the 5 years then the test is broken and one would have to start again.

2.2. For Companies and Trusts the test for residence is dependant on where they are formed and if not in SA whether they have their place of effective management in SA; i.e. the place where the company or Trust is managed on a regular day to day basis by the directors or senior managers of the company, irrespective of where the overriding control is exercised or where the board of directors meets.

2.3. The above rules are subject to the tie-breaker provisions of any Double Taxation Convention (DTC) that may apply; i.e. even if a person resides in SA for the relevant period he may still be deemed to be a non resident under the DTC provisions.

3.1. INCOME TAX CONSEQUENCES.

From the date that a person becomes a resident as above defined they are liable to effect payment of income tax on their world wide income. It is irrelevant that their income relates to foreign assets; i.e. assets acquired at a time they were not resident in SA. The only exception to this rule is a foreign pension which is not subject to tax under the provisions of Section 10(1)(gC) of the Income Tax Act (“the Act”) which exempts any:

(i) “ amount received by or accrued to any resident under the social security system of any other country; or

(ii) pension received by or accrued to any resident from a source outside the Republic, which is not deemed to be from a source in the Republic in terms of section 9 (1) (g), in consideration of past employment outside the Republic;”

9(1) (g) in turn provides for a pro-rating where the pension has been earned partly from SA services (which portion will be taxable) and partly from non SA sources which will be non taxable. Its pro-rating provisions are quite complicated and are as follows:

(Monies will be taxable on) “9(1) any pension or annuity granted to such person, wheresoever payment of that pension or annuity is made and wheresoever the funds from which payment is made are situate-

(ii) by any person, whether residing or carrying on business in the Republic or not, if the services in respect of which that pension or annuity was granted were performed within the Republic for at least two years during the ten years immediately preceding the date from which the pension or annuity first became due: Provided that if the pension or annuity was granted in respect of services which were rendered partly within and partly outside the Republic, only so much of such pension or annuity as bears to the amount of such pension or annuity the same ratio as the period during which the services were rendered in the Republic bears to the total period during which the services were rendered, shall be deemed to be derived from a source within the Republic”

In other words if that person worked in total for 730 days during that ten year period in SA then the pension will be taxable in SA but pro-rated to the extent referred to in the second Para.

3.2. DONATIONS TAX

3.2.1. Donations tax is payable by a resident in respect of a donation in excess of R100 000,00 (cumulative) in any tax year at the rate of 20% save in respect of foreign assets as defined by Section 56 of the Act reading as follows:

“(1) Donations tax shall not be payable in respect of the value of any property which is disposed of under a donation-

(g) if such property consists of any right in property situated outside the Republic and was acquired by the donor-

(i) before the donor became a resident of the Republic for the first time; or

(ii) by inheritance from a person who at the date of his death was not ordinarily resident in the Republic or by a donation if at the date of the donation the donor was a person (other than a company) not ordinarily resident in the Republic; or

(iii) out of funds derived by him from the disposal of any property referred to in subparagraph (i) or (ii) or, if the donor disposed of such last-mentioned property and replaced it successively with other properties (all situated outside the Republic and acquired by the donor out of funds derived by him from the disposal of any of the said properties), out of funds derived by him from the disposal of, or from revenue from any of those properties.

3.2.2. A person should therefore consider before becoming a resident donating their foreign assets to a trust or other like entity. This will ensure that the deeming provisions of Section 7(8) of the Act will not apply reading as follows:

“(8) Where by reason of or in consequence of any donation, settlement or other disposition (other than a donation, settlement or other disposition to an entity which is not a resident and which is similar to a public benefit organisation contemplated in section 30) made by any resident, income is received by or accrued to any person who is not a resident (other than a controlled foreign company in relation to such resident), there shall be included in the income of that resident so much of the amount of any income as is attributable to that donation, settlement or other disposition…”

If the donation took place, however, before the donor becomes a resident it is unlikely that this Section can be applied. Section 25B(2A) of the Act, however, will still apply in that any income received by a resident beneficiary from a non-resident trust will be subject to tax when received only by the resident provided the resident in question was a beneficiary of the Trust in the previous tax year to that in which the monies were received, i.e. it’s a discretionary trust.

3.3. CAPITAL GAINS TAX

A person becoming a resident will be subject to CGT on their world wide assets wheresoever situate. No exemptions apply in respect of ‘foreign assets’ Where assets were purchased in a non SA currency the determination of the CGT will be calculated in the foreign currency in respect of which the acquisition and sale was effected and the gain converted into SA rands at the average rate of the rand for the year in question as published by SARS

Under Para 80.2 of the Eighth Schedule a Capital Gain cannot be distributed to a non resident beneficiary of a resident from a trust. A capital loss cannot be distributed to a beneficiary whether resident or non resident and such gains or losses are subject to CGT in the hands of the Trust.

4.1. GENERAL INCOME TAX CONSEQUENCE...

This relates to the category of person who may or may not become residents as above defined in the fullness of time but have not yet made up their minds.The first consequence is that any income received from employment in SA is subject to local taxation on the basis of source. This will be at normal marginal rates subject to the taxation threshold of R43 000, 00 for the 2008 year of assessment (under 65) or R69 000, 00 (over 65). A foreign employee receiving employment income that exceeds the threshold is obliged to complete an income tax return. If the salary is paid into a foreign account by a foreign employer, then the employee will be taxable as a provisional taxpayer but otherwise the local company will be required to deduct tax on a PAYE basis. If the expatriate (“foreign employee”) is also subject to tax as a resident of another country, a double tax convention will generally provide the necessary credits resulting in the employee only being taxed in one of the two countries. The same position adheres in regard to director’s fees paid to such foreign employee by a local company.

4.2. ALLOWANCES AND FRINGE BENEFITS

Like any other local employee a foreign employee will be taxable on travel and subsistence allowances or such fringe benefits as are provided. Often this includes residential accommodation. The basic formula depending on the extent of the accommodation for calculating the monthly value of the fringe benefit is to take the person’s overall salary, to deduct R20 000, 00 there from and use a factor of between 15% and 17% of the resulting total divided by the number of months the accommodation is occupied, i.e. take a salary of R500 000, 00 the monthly taxable value would amount to R6 800, 00!

4.3. USE OF COMPANY CAR

The same provisions apply as do to a local employee namely that if granted the use of a motor vehicle by an employee a monthly benefit valued at 2.5% of the determined value is calculated; the determined value being the cost of the vehicle to the employer or where previously purchased the cost at the time less 15% per year until the employee has the use of it. The only tax efficient means of a company car today is where an employee keeps a logbook of business use for a private vehicle. At 2.5% per month the employee will be deemed to have received the full value of the car within three tax years which is a very expensive means of funding a motor vehicle!

4.4. RELOCATION COSTS

Payments by an employer to cover expenses such as the transfer of a foreign employee are exempt from tax in the employee’s hands and includes the expenses of transporting the foreign employee and members of his/her household and personal goods and possessions from the previous place of residence as well as the cost of renting temporary residential accommodation for not more than 183 days!

4.5. TAX DEDUCTIONS

While a foreign employee can deduct local pension fund contributions (limited to 7.5% of pension able salary) or obtain deductions for retirement annuity fund contributions to local funds, limited to the greater of 15% of non-pensionable salary or R3 500, 00, no deductions can be claimed from similar contributions to a foreign fund

4.6. MEDICAL EXPENSES

These can likewise be deducted in terms of the normal formula being contributions made to a local medical aid scheme or a foreign medical aid scheme provided it is registered under “provisions that are similar to those in the Medical Schemes Act……” For over 65 the deductions are unlimited.For under 65 monthly medical aid contributions up to R530,00 can be deducted plus R530,00 for the first dependant and R320,00 for each additional dependant. Medical expenses not recoverable from a medical aid scheme whether incurred inside or outside SA can likewise be deducted but (for anyone under 65 years of age) can only be deducted to the extent they exceed 7.5% of taxable income.

4.7. INTEREST INCOME

Interest received by non-residents from a source within SA is not taxable but this is subject to the non-resident being physically absent from SA for at least 183 days during the tax year in question which may often not be the case in regard to a foreign employee.

4.8. DIVIDENDS

A non-resident or foreign employee is not subject to tax on dividends from local companies.

4.9. CAPITAL GAINS TAX

At present Capital Gains Tax is payable by non-residents on any immovable property in SA including any interest or right of any nature in immovable property. This would include shares in a company where 80% or more of the market value of its net asset value comprises immovable property and the non-resident holds 20% or more (directly or through connected persons) in the company. A non-resident owning property in SA will be subject to CGT when the property is sold. Section 35 A of the Income tax Act now provides for a form of withholding tax where the seller is a non-resident in that the purchaser must withhold (i.e. not pay to the seller) a certain percentage of the purchase price where the amount due by the purchaser to the seller is more than R 2 million as follows: If the non- resident seller is a natural person, 5% of the amount due to him/her must be withheld, if the seller is a company then 7.5%, and if the seller is a trust, then 10% must be withheld.

4.10. CUSTOMS DUTY VAT

There are various exemptions applicable to a foreign employee bringing in household effects or motor vehicles in regard to both VAT and customs duty. Provided the same goods are taken back no such duties will be payable albeit that insofar as household effects are concerned they can be disposed of locally after a period of six months and one motor vehicle may be imported into the Republic free of duty and exempt from VAT.

4.11. ESTATE DUTY

Estate Duty at the rate of 20% is only payable on the death of a non-resident to the extent that a non-resident has property whether immovable or otherwise actually in SA. Thus, if a foreign employee owns a house, Estate Duty will be levied on the house, its contents and the like or whatever else is physically in SA on death. This can be avoided by ensuring that all such assets are held by an offshore or local Trust.

Many ex-South Africans returning after years abroad are under the mistaken impression that they will not be subject to Estate Duty in respect of assets purchased by them while they were non-resident, i.e. a London flat.The exemption only applies in respect of property acquired overseas before a person becomes a resident in the Republic for the first time. Thus, anyone born in the Republic but returning to retire in SA after a lifetime of working overseas will suffer Estate Duty on their worldwide assets. Again this can be avoided by creating a Trust and donating all overseas assets to such Trust before, or to the extent that such assets were purchased from monies earned from a foreign trade, then even after becoming a resident in SA subject again to the income deeming provisions of Section 7.

4.12. RESTRICTIONS ON PURCHASING PROPERTY BY NON-RESIDENTS

There are no restrictions on a non-resident purchaser. Thus a non-resident purchaser may be an offshore trust, an offshore foundation or whether registered in or otherwise. A purchaser does not need to be an entity that is known to South African law, as long as its existence and validity is compliant with the foreign jurisdiction in question where it is formed or administered. Section 8 of the Trust Property Control Act requires a foreign trustee to obtain the Master’s approval where he administers or disposes of trust property in . Likewise a foreign company must register as an external company under section 324 if it acquires “immovable property” in SA. However, there are borrowing restrictions for natural persons, companies and Trusts, namely that a person or entity can borrow three times the capital introduced pro-rated by the percentage that is foreign earned. A natural person being a non-resident would be 100% “foreign owned” as would a discretionary Trust with a non-resident beneficiary (i.e. capital introduced = R10 000, 00 you can borrow R30 000, 00) for commercial properties. For residential, however, the limit is restricted to whatever is invested; i.e. half of the cost of the house.

5.1. THE FOLLOWING RESTRICTIONS APPLY TO IMMIGRANTS:

5.1.1 Immigrants must declare that they are possessed of foreign assets and liabilities to an authorized dealer and give an undertaking that they will not make any of them available to South African residents.

5.1.2 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.

5.2. RESIDENTS WHO DO NOT LIVE IN SA

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!

Receipt of a dividend by a resident form a local source is exempt under section 10(k) but if received from a foreign company is subject to tax subject a rebate of R3000,00 for the 2008 tax year. There are various exemptions from this which include the following two major concessions providing for such dividends being non taxable where:

1. SA residents hold not less than 10% in a company quoted on both the JSE and a foreign exchange (Section 10k (ii)(bb)) or

2. A resident holds 20% or more in the share capital of a foreign company. Section 10k (ii)(dd)