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Provided by the South African National Department of Health
LEAVING SA: WHAT HAPPENS
TO YOUR ESTATE PLAN?
With amendments to tax laws targeting the foreign earnings of South Africans coming into effect on 1 March 2020, the number of local residents seeking to cease their South African tax residency and formalise their resident status for exchange control purposes has increased significantly. Leaving the country could have significant implications for estate planning, however – here’s what you need to know.
South Africans working abroad for more than 183 days during any 12-month period, which includes a continuous period exceeding 60 full days during that 12-month period, have until now not been taxed in South Africa on their foreign employment income. Section 10(1)(o)(ii) of the Income Tax Act 58 of 1962 (ITA) provided a specific exemption for this income.
This has now changed, however. Treasury was of the view that the exemption was creating opportunities for double non-taxation in cases where the foreign host country either doesn’t impose income tax on employment income, or taxes such income at a significantly lower rate. With effect from 1 March 2020, Section 10(1)(o)(ii) has been amended to allow the first R1.25 million of foreign remuneration to be exempt from tax in South Africa.
As a result of this amendment, all South African tax residents working abroad will from March be subject to tax in South Africa on all foreign employment income earned exceeding R1.25 million. However, if tax has been paid on these earnings in the foreign host country, they’ll be able to claim this as a credit in South Africa, limited to the amount of local tax payable on the foreign earnings.
Many South Africans who have already left the country are now rushing to ‘officially’ cease their South African tax residency to avoid unnecessary complications as a result of the amendment. However, there are several potential stumbling blocks to consider before taking this step.
It’s important to realise that ceasing tax residency isn’t the same thing as formal emigration. If you’ve ceased your South African tax residency and have paid the necessary taxes, you’ll be seen as a non-SA taxpayer. Formal emigration, however, means taking all your assets out of the country, which involves a South African Reserve Bank (SARB) process resulting in a change of your residency status for exchange control purposes. This process is known as ‘formalising’ your emigration.
If you haven’t formally emigrated, but have ceased your South African tax residency, how will it impact your estate plan, especially the intergenerational transfer of wealth? What do you need to think about?
Many South Africans are either trustees or beneficiaries of a local trust. If you’re a trustee, complications may arise if you wish to relocate. You may in fact need to resign as trustee. The Master of the High Court may require that you furnish security, unless there are grounds for exemption. If no security can be provided, the Master may request that you be removed as a foreign trustee.
What if you don’t know that you’re the beneficiary of a trust? In cases where a trust has been set up by parents or grandparents for the purposes of intergenerational planning and preservation of wealth, beneficiaries may not even be aware of their status as such. We can’t emphasise enough the importance of honest and open communication between generations – the financial impact can be significant if decisions are made without full knowledge by relevant family members of wealth transfer plans.
Then there are also implications if beneficiaries living abroad are in need of financial assistance, and the trustees authorise trust distributions to these beneficiaries. When a capital gain is distributed to a non-SA resident trust beneficiary, the conduit principle (shifting the tax burden to the beneficiary) will not apply and the trust will pay the taxes at a higher effective rate of 36%.
If you as a beneficiary are still a South African resident for exchange control purposes, you can’t receive the funds freely – exchange control regulations will need to be taken into account. You’ll have to use your discretionary allowance (R1 million per calendar year) or your foreign investment allowance (FIA) (R10 million per calendar year) to receive the funds offshore. If you make use of your FIA, you’ll first need to obtain a SARS tax clearance certificate – which means your South African tax affairs have to be up to date.
Punitive taxes imposed by some other jurisdictions present a further potential challenge. If you as a beneficiary are living in the US, UK or Australia and receive distributions from foreign trusts, including South African trusts, then those countries may hit you with punitive taxes. If a local or an offshore trust has beneficiaries in these jurisdictions, it’s crucial to obtain expert advice before any distributions are considered.
In broad terms:
To complicate matters further, the US Foreign Accounts Tax Compliance Act (FATCA) requires trustees or the relevant financial institution managing the trust assets to report to SARS that a US resident or green card holder is a beneficiary of a trust, and SARS will report the same to the IRS. Similarly, resident beneficiaries may be subject to certain Foreign Bank Account Report (FBAR) requirements directing them to declare to the IRS if they have funds available outside the US.
In terms of the Common Reporting Standards (CRS), the details of settlors and beneficiaries of trusts must be recorded, and this information is available to all CRS-member countries, including South Africa, Mauritius, the Channel Islands, Australia and the UK.
Besides setting up a trust, another option for transferring wealth to the next generation is simply to bequeath assets directly by way of a last will and testament. Again, it’s important to understand all the implications. If your children haven’t placed their emigration on record with the SARB, they’ll only be allowed to transfer their inheritance offshore by making use of their discretionary allowance and/or FIA, provided that their South African tax affairs are up to date.
It should be clear that ceasing your tax residency doesn’t mean an end to all problems. It’s critical to consider the impact on your estate plan (whether it’s your own or an intergeneration plan) when you leave South Africa. There is no one-size-fits-all solution. Everyone’s personal circumstances, and therefore estate plan, is unique and it’s crucial to seek professional advice – whether it’s you who is relocating, or your grandchild.
If you need any information or assistance with regard to any aspect of estate planning, please contact Christine Bornman at christineb@privatewealth.sanlam.co.za or Stanley Broun at stanleyb@privatewealth.sanlam.co.za.
The formation and registration of trusts, and the provision of independent trusteeships – both local and offshore.
The creation of BEE, charitable, special and Shariah trusts compliant with regulatory and legislative requirements.
The administration of deceased estates in South Africa and abroad.
Advice on complex structures, asset restructuring and bequests in foreign jurisdictions.
Advice on emigration and immigration, foreign earnings and the application of any double taxation agreements.
Updating trust deeds to ensure they’re in line with the latest changes in the trust environment.
Updating and/or drafting of wills dealing with South African and/or foreign assets.
Advice on the establishment and management of charitable organisations, their tax status and tax deductible donations.
Advice on the potential tax consequences and reporting obligations if you hold a US passport or green card, or if you have children living in the US.
Guidance on the financial implications of life-changing events, such as getting married, divorce or the birth of a child.
Expert advice is crucial in dealing with cross-border estate and tax planning.
Stanley Broun has spent 10 years in Fiduciary And Tax.
Have a question for Stanley?
