AMENDMENT FROM MARCH 2020
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, are currently not taxed in South Africa on their foreign employment income. Section 10(1)(o)(ii) of the Income Tax Act 58 of 1962 (ITA) provides a specific exemption for this income.
However, this will change from next month. Treasury is of the view that the current exemption is 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 million of foreign remuneration to be exempt from tax in SA.
As a result of this amendment, South African tax residents who fall within the ambit of Section 10(1)(o)(ii) will from March be subject to tax in SA on all foreign employment income earned exceeding R1 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 SA, limited to the amount of local tax payable on the foreign earnings.
CESSATION OF SA TAX RESIDENCY
With the cut-off date just around the corner, many South Africans who have already left the country are rushing to ‘officially’ cease their SA 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 SA 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 SA, 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.
IMPACT ON ESTATE PLANNING
If you haven’t formally emigrated, but have ceased your SA 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 an SA 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 an SA 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 SA 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 SA trusts, then those countries may hit you with punitive taxes. If an SA or an offshore trust has beneficiaries in these jurisdictions, it’s crucial to obtain expert advice before any distributions are considered.
In broad terms:
- When an Australian resident beneficiary receives a capital distribution consisting of current or historic capital gains from an SA trust, the capital distribution has to be included in assessable income in Australia.
- In the case of a US tax-resident beneficiary (typically a US citizen or green card holder) the entire distribution could become payable to the US Internal Revenue Service (IRS) as tax.
- In the UK, the rules pertaining to the nature and composition of distributions are extremely complex. This may result in additional taxes arising in the hands of UK beneficiaries if the trustees have not kept a careful record of historical income and gains, and kept income and gains separate.
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 SA, 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 SA 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 SA. 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 firstname.lastname@example.org or Stanley Broun at email@example.com.