In these unprecedented times, the old saying that nothing is certain except death and taxes, feels truer than ever. This is particularly the case for taxes of South African residents given the South African Revenue Services’ renewed focus and energy, displayed in the establishment of its Unit for High-Net-Worth Individuals.
In the last decade we’ve seen a steep increase in the number of our high-net-worth clients diversifying their investment portfolios offshore to spread their financial and liquidity risks. Even though this makes 100% sense from a financial diversification perspective, the tax consequences can become complex, depending on the structure selected to host these offshore assets.
Despite SARS approved structures used by South African residents in their personal capacities or through offshore trusts and/or offshore companies, various tax pitfalls can arise if these offshore investment structures are not correctly accounted for. For example, donations tax might be applicable on interest free loans to offshore trusts and/or companies. Historically capitalised offshore trust fund reserves might be taxable in South African beneficiaries’ hands upon receiving distributions years later, depending on the historical nature of the distributed reserves. Or, depending on the types of shareholding and percentages held by SA residents and their related parties in offshore companies, these South African residents might be liable for taxes on their participation in a controlled foreign company.
A common mistake made by South African taxpayers, is to appoint an offshore accountant to compile the Annual Financial Statements of their offshore investment trusts or companies. These offshore accountants typically have no or limited knowledge of the South African Income Tax Act, leading to financial reporting with potentially limited use when it comes to SARS reporting obligations.
South African tax residents are ultimately liable for taxes on their world-wide income, and proper tax and accounting of offshore investment structures by South African accounting experts in the field, remains critical.
If the accounting and reporting of your offshore investments has you worried, feel free to contact myself or my team. We specialise in making sure that the tax and reporting compliance of our clients is taken care of. Let’s see if we can help you.
Disclaimer: This blog is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).