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When tax becomes a turning point for people to stay or leave

A change to the taxation of foreign trusts means any repatriated income or capital gains will now be taxed.

A recent change to the taxation of foreign trusts will have far-reaching effects on the distribution of income and capital gains to South Africans.

According to tax executives, it may just be the final push for South Africans with a large asset base offshore to join their assets rather than repatriating them and paying a maximum of 20% tax.

In terms of the Taxation Laws Amendment Act, any income or capital gains that would previously have been exempt from tax will now be taxed from March 1 this year.

Baker McKenzie’s legal and tax experts Matthew Tout and Arnaaz Camay say these changes came as a result of a push by the legislature to close identified loopholes associated with foreign trusts and seek to regulate SA resident individuals who have an indirect interest in a foreign company through foreign trusts.

Participation exemption removed

Keith Engel, CEO of the South African Institute of Tax Professionals, says SA allowed for a “participation exemption” in 2002 in order to be internationally tax-competitive.

This exemption meant that if a South African tax resident owned shares in a foreign company, they were exempt from tax on dividend and capital distributions.

The European and British legislature allowed for a participation exemption so as not to discourage their tax residents from repatriating money from a foreign source.

“In the US they are taxing the money that is coming home, so people tend to keep it offshore longer,” says Engel, who was at National Treasury in 2002 when the participation exemption was introduced.

SA basically followed the European and British models, but this has now changed. All distributions from a foreign trust to a South African tax resident made after March 1 2019 will be taxed.

Johan Troskie, an international tax and commercial lawyer, says the amendment had been hinted at earlier – effectively to tax foreign companies held by interposed offshore trusts, the so-called look-through principle.

Tax avoidance concerns

Offshore trusts have long been seen by the South African Revenue Service as part of various measures to avoid tax in SA.

“My difficulty is that tax legislation in SA is often so blindly aimed at tax avoidance that we miss the opportunity of good tax law,” says Troskie. “Why would SA beneficiaries not enjoy the participation exemption of a foreign trust in a foreign company?”

This look-through principle may further contribute to driving much-needed investment capital from SA at a time when we definitely cannot afford it.

“The people and families who this measure is aimed at are the very people who start new ventures and employ people in SA – we should welcome them, not drive them away.”

Engel says in most instances distributions are only made when the South African tax resident wants to bring the money back to SA. But with a maximum tax rate of 20% for individuals, it becomes expensive.

The people who are affected are those who set up offshore trusts but did not want to keep the money offshore indefinitely.

“It will not hit the super-rich because they never intended to bring the money back,” says Engel. “People who set up offshore trusts as part of their expatriate planning will also not be too bothered.”

The people who do care are those with lower levels of wealth, or who have greater income needs in SA than they anticipated.

It is these people who may want to repatriate the money. It is also people who wanted to build up some offshore reserves but had no intention of leaving SA.

“Although it [the amendments] want to devalue offshore trusts as a whole, it really only devalues the repatriation. It will hit people who have assets of around R20 million to R40 million.”

Wealthier people are increasingly making the decision to leave the country, and sometimes  tax becomes a make-or-break point.

“People say tax became the turning point for them,” says Engel, “if they are already half in and half out, the tax aspect pushes them to leave.”

It is similar to the limitation on foreign income tax exemption, where only R1 million of the foreign income will be exempt from South African tax.

Theoretically, the foreign trust charge does have merit. However, whatever gain SA gets in taxing the repatriated income or capital gains in the short run, it will lose from the tax base in the long term, adds Engel.

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Attention South Africa– Look @ Chicago, New York and California, they have raised the taxes so much that people are fleeing these states and cities for a lower tax state. New York is now mulling over a “Leaving tax.” The working electorate is being stretched BEYOND what can keep them happy with their finances!!! But Socialist countries always react too late. You know what that means

I’ve never understood the rationale for the participation exemption. Thanks for clearing that up Amanda.
What I still don’t understand is why some people should get to pay only up to 20% (and still complain) while others pay up to 45 %, effectively cross-subsidising the trust fund kids , as well as everyone from Stellenbosch to Nkandla ripping the ring out of the system.
And if a SA tax resident beneficiary gets a distribution and does NOT repatriate it but rather leaves it offshore, or spends it offshore, isnt this new tax is applicable?

If you pay up to 45% tax that means you are earning an absolutely massive salary compared to most of the citizens in this country. Yet here you are crying poverty.

Where am I crying poverty? I am calling for equal treatment of all who should fall within the tax base. Or like in rugby a few years back, should Pocock and McCaw be allowed to have one rules for the ruck, and South African players have another set of rules applied by the ref?

Trust fund babies indeed!

What has been highlighted are rich people’s problems…. and they are a handful.

Rambo, i’m seeing a lot of rich people leaving these last few months. I think we are going to be surprised how quickly these rich people’s problems are going to be our problems once that hole in the tax base comes through

How welcoming this third-world country is to money? Glad to be divesting and leaving but can only pray for those remaining

I don’t understand this new amendment. Section 7(8) always taxed the donor/founder/settlor of the trust on any income which arose in an offshore trust. How is this different?

Perhaps it’s more about what is being done with my tax money, than the type (or level) of tax actually levied. We know that SA lost the battle of proper government spend comprehensively, making people more and more unwilling to pay any form of tax.

It’s not necessarily about how much tax you pay but rather what you get for it.

When taxpayers realize their money is going down a bottomless hole and they have to pay private companies for essential services, they will naturally look elsewhere.

The difference between SA 20 years ago and now is that the actual tax rate now has practically doubled since we’ve had to outsource electricity, water, security, paying professional queuers etc just to maintain lifestyles of the past.

Agreed and I think SA is approaching some sort of end game. Ratings downgrade has been staved off, Eskom staggers along but no real change in the bone headed policies of the ANC so, as I see it, the only way ahead is down. So tax is needed just to plug holes, Eskom, government’s bloated salary bills, house upgrades, all sorts of vanity projects so forget getting anything for it.

Tax systems will become increasingly normalised around the world, which is good.

It is nonsense that John pays no tax because of structures via a post box in a tax haven and Peter pays normal tax.

The article mentions holding shares in a company via a trust. Presumably this is more aimed at share in private company than a trust that owns listed offshore assets as those dividends anyway are subject to withholding tax.

One thing we need better clarity on is foreign tax credits. If you ask three experts you get five answers!

I’m not so sure Johan. I think there will be a balance. As fast as countries close “loopholes”; essentially increasing personal tax rates, so opportunity for countries like Mauritius and Monaco opens up.


Where the game gets tricky is the FATCA side on banks. Pretty much, a bank that wishes to transact in any of the main currencies has to report the real identities of clients to tax authorities, along with all those FATCA details and flows. A bank that breaches the rules can pretty much close its doors.

It is like this in all socialist countries. Initially, it is the taxpayer who contemplates leaving. Eventually the beneficiary of the tax, the recipient of the social grant, also contemplates leaving. We see more than 3 million Venezuelans fleeing from their own socialist government. Those strategies of government that aim to “equalize the wealth gap” only serve to widen the wealth gap, and to increase the general levels of poverty.

A government destroys the goodwill, the economy and the tax base when it uses tax laws to extort charitable donations from the minority. A high tax rate is a punishment for efficiency and intelligence. Abuse these crucial economic agents for long enough, and they will silently move to jurisdictions where they are nurtured and valued.

Clamping down on dodgy trust structures are long overdue. Its happening everywhere (not just in SA). Its a whole industry built on tax avoidance – Transfer pricing and and moving the effective place of management to benefit a few wealthy individuals – There is nothing sinister about this move…

Tax avoidance = legal, tax evasion = illegal

Yes, why I said tax avoidance… and that is why the Income Tax Act keeps changing to close the loopholes. As per the article

I’m not totally convinced Gemini. I happen to think that the wealthy will just move to jurisdictions where there overall tax bill vs benefits is lower and the regulations you love will only net a few small fishies. It is a fine balance deliberately targeting the wealthy (and those who may be the most entrepreneurial job creators and investors) may not be so clevva in the longer term.

Of course we won’t mention wholesale corruption of SARS and theft of taxpayer money.

I guess the legislation clamping down on state capture and looting will be out soon! Yeah right.

There is, however, a special exemption for certain Dubai-based or -invested families

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