By: Bernie Herberg, Director in the Relationship Management Division Stonehage Fleming
The summary below deals only with the proposals that will typically affect high net worth individuals, their structures and that of their businesses.
Unless indicated otherwise it is proposed that the amendments will come into operation in respect of years of assessment commencing on or after 1 January 2021.
Tax amendments linked to emigration and exchange control relaxation
“As announced in the February 2020 Budget, the foreign exchange control system will be modernised and a new capital flow management system will be put in place. This new system will move from a ‘negative list’ system to one where all foreign-currency transactions, other than those contained on the risk-based list of capital flow measures, are being allowed.
In respect of individuals, one of the changes to be implemented is the phasing out of the concept of ‘emigration’ for exchange control. The other significant change is the relaxation of exchange control rules in respect of ‘loop’ structures.
These changes necessitate some tax changes as follows:
- Currently, lump sum payments are allowed when a member of a pension preservation, provident preservation or retirement annuity fund withdraws from the retirement fund due to that member emigrating from SA, and such emigration is recognised by the South African Reserve Bank (‘SARB’) for exchange control purposes. This means that emigrating members can withdraw, with normal withdrawal taxes payable, without having to wait until retirement age of 55 to do so. With the announcement to move away from SARB formal emigration, there is a need to change this provision. As such, the wording (contained in the definitions of ‘pension preservation fund’, ‘provident preservation fund’ and ‘retirement annuity fund’) will be amended to make provision for the payment of lump sum benefits when a member ceases to be an SA tax resident, and such member has remained a non-tax resident for at least three consecutive years or longer. It essentially means that the lump sum payments can only be made three years after ceasing to be an SA resident. This change will come into operation on 1 March 2021.
- Transfer of listed securities to an offshore exchange: Currently the migration of a listed share to an exchange outside of SA requires approval from the SARB but this approval will be phased out. A new section 9K is proposed to introduce a deemed disposal at market value when a domestic listed security is removed from the JSE register and is listed on an exchange that is outside SA. If the person holding the security remains a SA tax resident, such person will be liable for tax on further gains when the security is subsequently sold.
- ‘Loop’ structures (where a SA resident owns in excess of a 40% shareholding of a foreign company that reinvests into the Common Monetary Area (‘CMA’) are currently in contravention of the Exchange Control Regulations as they contravene the regulation that capital or any right to capital is directly or indirectly exported from SA. A ‘loop’ structure is typically one where a resident sets up an offshore structure that re-invests into the CMA by acquiring shares or other interest in a CMA company. Returns accruing to the foreign company (or trust) on the SA investments could be in the form of dividends, interest or other amounts. Should this be permitted it will have the result that, under Controlled Foreign Company (‘CFC’) rules, a dividend accrued by the non-resident company from the resident company would be exempt and when this dividend is distributed to the SA resident shareholder as a foreign dividend, the foreign dividend could be exempt under the participation exemption. Furthermore, gains on the sale of shares in a non-resident company (if more than 10%) to a non-resident are exempt in terms of the participation exemption. In order to address this, it is proposed that changes be made so that a CFC includes a portion of a dividend that is received or accrued from a resident company in net income. It is further proposed that the participation exemption should not apply to the disposal of shares in a CFC to the extent the value of the assets of the CFC ‘is derived from assets directly or indirectly located, issued or registered in SA’. We observe that these terms could be difficult to apply (e.g. in the case of a listed company) and would need to be refined for purposes of the final legislation.
Elana Nel, Director in the Tax Advisory Division says:
Personal tax and donations tax
- Foreign employment income: As announced in February 2020, the cap on the exemption of foreign remuneration income is increased to R1.25m per year from 1 March 2020. (This change is made in the Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill).
- Section 7C of the Income Tax Act addresses the transfer of wealth by no or low interest loans to trusts or companies owned by trusts. It is stated that these rules are circumvented by taxpayers subscribing for preference shares in companies owned by the trust connected to the individual. It is therefore proposed that under these circumstances preference shares will be deemed to be loans advanced and dividends paid will be deemed to be interest. We anticipate that individuals who previously restructured their loans to preference shares may wish to review their existing structures.
- Deemed disposal where a SA tax resident company ceases to be resident: When a SA tax resident company changes its tax residency, such company is deemed to have disposed all of its assets for a consideration equal to their market value. This provision is now being taken one step further – it is proposed that not only will the company be deemed to have disposed of its assets but also that the shareholder in the company is deemed to have disposed of the shares in the company at market value.
- Donations tax: In 2018 changes were made for donations which exceeded R30m to be subject to the donations tax rate of 25% (instead of 20%) and the effective date was 1 March 2018. An amendment will be made to clarify that the aggregation only commences on 1 March 2018.
Charl du Toit, Partner in the Tax Advisory Division, says:
- All Venture Capital Companies (‘VCC’) registered with SARS as at 1 March 2020 are requested to submit to the Minister of Finance information prescribed in the survey as mandated in terms of section 12J (10) of the Income Tax Act. The information will be considered in determining the extent to which the VCC tax incentive contributes towards Government’s policy objectives of facilitating funding for small businesses that cannot obtain financing from financial institutions, economic growth and job creation.
It is important to note that the details on the proposed changes are not final. There is an opportunity for the public to comment, which may result in amendments before the final legislation comes into effect.”