“A DEEMING LOOPHOLE”
In a previous article I forecast that Mr Manuel was going to happily proclaim the complete dismantling of Exchange Control to thunderous applause during his Budget Speech in February 2006. At approximately the same time that the article was published a further guideline was issued by the Reserve Bank in early July setting out the basis on which anyone who had not taken advantage of the Amnesty Act could still regularise their foreign assets and included reference to a levy of between 10% and 30% for applications received before the finalisation of “the Amnesty process” and thereafter a rate of between 20% and 40%. I have no doubt that finalisation will take place before February next year.
Although the guidelines contain no details as to how SARS will deal with the position, it is likely that any information furnished to the Reserve Bank will be passed on to the Receiver in view of the fact that the mutual secrecy provisions were lifted with the Amnesty Act. I believe SARS will deal even handedly with anyone who only now owns up to having offshore assets but will apply the provisions of Section 7(8) where the assets in question have been donated to a foreign trust.
Section 7(8) is a deeming provision whereby any person who has donated assets to a foreign trust is liable to pay tax on any resulting income received by such foreign trust. This Section began as Section 9D as from the 1st of July 1997 and related to foreign income then taxable in South Africa i.e. basically interest from banks and Building Societies but was reinserted with effect from 1st January 2001 when the new residence based system of taxation became applicable. Thus it now relates to any income accruing to foreign trusts as a result of a donation by a resident donor.
Section 4 of the Amnesty Act introduced a like deeming provision in substitution for Section 7(8) so that as from the 1st March 2002 where such a donation had occurred any income accruing would be deemed to be income accruing to that donor and likewise for any capital gain. Section 7(8) and Paragraph 72 of the Eighth Schedule were then specifically excluded.
As fiscal legislation does not have retrospective effect this means that anyone who donated assets to a Trust prior to the 1st of July 1997 will not be hit by the provisions of Section 7(8) if that person now owns up to such assets to the Receiver of Revenue as well. Amnesty Applicants will still be covered by Section 4 but if the Trust in question disposes of those assets to a “pour-over” trust the Receiver will likewise not be entitled to deem income earned by that “pour-over” trust to be that of the Donor in terms of Section 7(8) because the assets being poured-over were obtained “in consequence of” the original pre-1997 donation. I understand that the Receiver has confirmed this interpretation under a private ruling which has not as yet come to light! I suspect, however, that if Trust assets were donated post 1st July 1997 and the assets are distributed to a “pour-over” Trust, while such distribution will not attract Donations Tax (because the disposal is deemed to be effected at its market value), the Receiver will re-impose Section 7(8) deeming the income to be that of the donor. Because of the different wording of Para 72 from that of Section 7(8) I believe that once Capital Gains Tax has been paid consequent upon a distribution of assets to a pour-over trust the attribution under that paragraph will be severed for ever and a day. Thus, on both counts a pour-over trust could create very substantial advantage to local residents with foreign investments.