If you are a South African taxpayer and have investments offshore, then you are liable to SARS for the same taxes on those investments as if they were invested locally. In other words, income tax, capital gains tax, donations tax and estate duty apply to your investments wherever they are located.
This was the strong message that Diane Seccombe, head of taxation at the Mazars Academy, had for attendees of Glacier by Sanlam’s recent Offshore Deep Dive conference, which focused on offshore investments. And she said that while all these taxes could apply, some of them come with more onerous conditions than for local investments. For example, the exemptions on interest income (R23 800 a year for people under 65 years of age and R34 500 a year for people 65 and older) do not apply to foreign interest accruing on offshore investments – you are taxed on the full amount according to the SARS income tax table.
Seccombe says that where the foreign jurisdiction applies its own taxes, you may qualify for a rebate on local tax in respect of foreign taxes paid. The provisions of a double taxation agreement that South Africa has with that country must also be considered.
She says too many investors do not fully consider the tax implications of their offshore investments – regarding both their obligations to SARS and the tax regime in the offshore jurisdiction. Furthermore, your liability to SARS applies even when you do not bring any income from those investments back into South Africa. On investments that lie untouched, accruing returns in their offshore jurisdictions, you are still responsible for declaring the returns and paying any taxes due on those returns annually.
“It is often difficult for taxpayers to understand that an amount can be included into ‘gross income’ despite the taxpayer having had no physical receipt of the amount as long as the amount has accrued to them for tax purposes. Foreign amounts do not have to be repatriated to South Africa for them to be taxable,” Seccombe says.
Capital gains tax
If an amount you receive is the result of the disposal of a capital asset, it does not fall within your gross income for the year, but any gain is subject to capital gains tax (CGT).
“Disposal” has a wide definition, Seccombe says. CGT is not only triggered when you sell an asset; it is also triggered when, subject to certain conditions and exclusions:
• Assets are “swapped” or “switched”. This happens frequently with cryptocurrency investments, Seccombe says, where one type of cryptocurrency is swapped for another. Each swap falls under the definition of a disposal. The same applies to collective investments, if you switch from, say, an offshore equity fund to an offshore balanced fund from the same provider.
• You donate the asset to another person. (Unless that person is a spouse, donations tax will also apply – it is payable on the market value of the asset donated.)
• You emigrate.
• You pass away (subject to a R300 000 exclusion).
Seccombe emphasises that if you are trading assets – in other words, if you are buying and selling assets regularly – your profits are regarded by SARS as income and not as capital gains.
Types of assets
Seccombe makes the following points regarding taxes on the different asset types:
• Foreign collective investments and shares in foreign companies. As a general rule, foreign dividends are included in your gross income and any portion of the amount that is not exempt will be taxed at the income tax rate relevant to you. There is a 25/45 partial exemption for natural persons. You are not allowed to deduct any expenses incurred in receiving foreign dividends, such as investment fees or the costs of acquiring foreign shares.
• Offshore immovable property. Rental income from any property you own offshore is regarded as income from foreign trade. “Any losses from foreign trade cannot be offset against local trade income, only against foreign trade income,” Seccombe says.
• Crypto-assets. As above, if you are trading in crypto-assets held offshore and you suffer a loss (as may have occurred with the recent crash in cryptocurrencies), you cannot offset this loss against your local income.
• Offshore endowment policies. If you have an offshore endowment policy through a local provider, your investment is taxed within the endowment in the hands of the provider at flat rates of 30% on income and 12% on capital gains. What you receive is tax-free.
At the Glacier conference, Nico le Roux, consultant at foreign exchange consultancy Incompass, briefed the audience on South Africa’s exchange control regime. He said that over the years since the advent of the democratic era we have seen a gradual relaxation of foreign exchange controls - the current annual discretionary offshore allowance is R1 million, and on top of that there’s a R10 million annual investment allowance subject to clearance by SARS. But even here the regulators are flexible, as you can apply to the South African Reserve Bank for special clearance to invest larger amounts offshore. In fact, Le Roux says we’ll probably reach a point in this relaxation of controls when the amount you can take out of the country is almost limitless. However, he says your obligation to report what you are taking offshore will always remain, with SARS taking on increasing responsibility for this process.
Le Roux warned that breaches of the R1 million discretionary allowance may happen without you realising it if you are investing through various institutions. A 20% penalty applies on any amount by which the R1 million limit is breached.
He noted two recent important developments in the exchange control regime:
• Offshore assets can now be transferred between local residents. No reporting is necessary, Le Roux says, but this is subject to full tax compliance, which can include income, donations and CGT.
• Inheritances, gifts and donations can stay offshore without reporting (with effect from February 22 this year), although again, you need to be tax compliant.