Capital Gains Tax and Investing Offshore
10 September 2012
Posted by: Author: Elana le Roux
Capital Gains Tax and Investing Offshore
As has been the case in each of the past two Budgets, the South African Revenue Services (SARS) has targeted ultra-high net worth individuals (UHNWI) with specific measures that usually affect only the wealthy.In this budget year, it was the turn of Capital Gains Tax (CGT) to be raised.
"This has implications for all South African investors irrespective of where their investments are located, but is of particular significance to UHNWIs”, says Elana le Roux, manager for tax advisory at international Multi Family Office Stonehage.
"A rate increase affects any investment decision.In this case, the increase in the inclusion rate of CGT was from 25% to 33.3% for individuals and special trusts, and from 50% to 66.6% for companies and other trusts.To mitigate the impact on middle-income earners, the various exclusion thresholds were increased,” she explains.
Those inclusion rates are then multiplied by the respective tax rates of 28% in the case of companies, 40% in the case of trusts, and the applicable marginal rate in the case of individuals and special trusts to give effective tax rates of 18.6%, 26.7% and a maximum of 13.3% respectively.In looking at the total cost to a company, you should factor in the need to pay the dividends tax, presently 15%, which increases the company effective tax rate from 18.6% to 30.8%.
The position gets more complex when looking at offshore investments.South African residents pay CGT on their worldwide investments and assets, including on funds externalised by way of an individual’s annual foreign investment allowance of R4 million.Depending on the tax legislation in the particular jurisdiction of the investment, the position of double tax is a possibility.However, South Africa has entered into double taxation agreements with various countries which could mitigate the extent of the potential double taxation.If there is no double taxation agreement in place, or if the agreement does not mitigate the double tax in a particular case, the local tax regime also has provision for the claiming of foreign tax credits, explains Le Roux.The difficulty of claiming foreign tax credits is that it creates added complexity for the individual taxpayer.
"Foreign assets of residents must be disclosed on South African residents’ tax returns.”Where taxpayers took advantage of last year’s voluntary disclosure programme, which ended last October, and declared their previously undeclared offshore assets, these taxpayers need to be aware that these assets in future should be included in their list of foreign assets.
"Foreign investment houses may not be set up for all the administration that accompanies offshore investing for South Africans,”Le Roux says.The tax years of different jurisdictions often do not correspond.It remains the taxpayer’s obligation to determine the correct income earned for the tax year as income tax and capital gains tax statements are not necessarily issued as is the case with South African institutions.
It is not uncommon for UHNWIs to be unsure of the exact extent of their asset holdings.This means they can easily fall foul of regulations through no direct fault of their own.
Indeed, the net of regulations is getting wider and tighter and will continue to do so into the future.There is no escaping your reporting obligations whether intentionally or unintentionally.Le Roux explains that South Africa is currently entering into taxation information exchange agreements with various countries for the exchange of information that is relevant to the administration and enforcement of the domestic laws concerning certain taxes of the relevant parties.
"Ignorance is no excuse: you need to make yourself aware of your assets and your obligations in terms of declaring them and the income and capital gains arising from them.If taxpayers have any concerns regarding the tax status of their offshore investments and particularly regarding CGT, they should involve professionals to assist them,” Le Roux cautions.
Source: By Elana le Roux (TaxTALK)