(International Adviser) -
In the furore over the removal of the tax exemption on foreign earnings, it has become clear that many South African expats are not fully aware of their existing tax obligations on offshore savings and investments and time is running out, warns Old Mutual Wealth’s David Denton.
South African expats have been in uproar following the February 2017 Budget announcement in that they may need to pay income tax on overseas earnings from March 2019.
If the proposals are enacted in their current form, expats living and working in countries where tax is not paid on their earnings will have to start paying up to 45% of the sum to the South African Revenue Service (Sars) even though they are not physically present in the country.
An unexpected side effect of the proposals, however, has been the revelation that many expats may be unknowingly breaching existing tax rules regarding their offshore investment income and gains.
Denton, who is head of international technical sales at OMW, warns that this lack of knowledge is “a huge issue” and has cautioned that “time is running out to put this right”.
“There is widespread concern over the implications the new proposals by Sars could have on South African expats living and working in tax benign countries – such as the UAE.
"In these discussions, it has become apparent that many advisers and clients are unaware that, under current legislation, South African expats who have retained their ordinary resident status may need to declare and pay to Sars income tax from investment earnings and on gains.
“This lack of knowledge could explain why assets being disclosed through the current ‘special voluntary disclosure programme’ (SVDP) have been below expectations. Time is running out, and advisers and client really need to address this issue before the end of August disclosure deadline.
“It’s not all doom and gloom. Offshore bonds can offer a lifeline to those who want to save for their future but in a tax efficient way, and who don’t want to be burdened with ongoing reporting and administration,” Denton said.
Retained resident status
Under current legislation expats who have retained their ordinary resident status need to declare and pay to Sars income tax from all investment earnings and on gains.
So, for example, an expat living in the UAE may need to pay up to 45% in tax to Sars on any investment and savings income they receive on a worldwide basis.
Anyone who hasn’t appropriately paid their taxes have been urged by the South African Government to take advantage of the SVDP, which offers the opportunity to come clean and declare any income and gains received over the years.
It will mean paying the required tax to Sars, plus penalties, but if done now, it will avoid any potential prosecution.
The 31 August deadline coincides with the implementation of the Common Reporting Standards (CRS), which both South Africa and the UAE have subscribed to, along with approximately 100 other countries, and will hugely improve global tax transparency.
Once the investments have been disclosed, they will become visible to Sars, with the on-going obligation to pay any tax due on the remaining investments.
This makes investment choice extremely important for expats who will need to consider the best way of managing their investments more effectively going forwards.
Minimising the burden
Paying income tax and tax on gains to Sars on an arising basis means any active management by the investor could lead to more onerous tax reporting and investment decisions will need to be balanced with tax considerations.
However, there is a way for investors to continue to actively manage their investments whilst minimising any tax reporting burden and ensuring assets become more efficient to manage.
By restructuring the assets into appropriately structured single premium offshore bonds, the investor gains much greater control over the timing and nature of any events that are chargeable to tax.
All taxes are deferred within an appropriate offshore bond (except for any withholding taxes that cannot be reclaimed on income or dividends received), and only on a planned encashment would a tax situation arise.
They are also more tax effective as any growth is taxed as a capital gain rather than investment and savings income, meaning it attracts a lower effective rate of tax.