If you are a South African taxpayer and have investments offshore then you are liable to SARS for the same taxes on those investments as if they invested locally. In other words, income tax, capital gains tax, donations tax and estate duty apply to your investments wherever they are located.
Whilst all these taxes could apply to your offshore investments, some of them come with more onerous conditions than for local investments. For example, the exemptions on interest income (R23 800 a year for people under 65 years of age and R34 500 a year for people 65 and older) do not apply to foreign interest accruing on offshore investments. With the latter you are taxed on the full amount of interest.
Where the foreign jurisdiction in which you have investments applies its own taxes you may qualify for a rebate on local tax in respect of any foreign tax paid. This may depend on the provisions of any double taxation agreement South Africa has with the relevant country.
Unfortunately, too many investors do not fully consider the tax implications of their offshore investments – regarding their obligations to SARS as well as the tax regime applicable in the offshore jurisdiction. The tax obligation to SARS applies even if you do not bring any income from offshore investments back to South Africa.
If an amount you receive is as a result of the disposal of a capital asset, the gain on such disposal may be subject to Capital Gains Tax. CGT does not only apply to realised disposals but also to assets which are “switched” or “swapped”. The latter happens frequently with cryptocurrency investments where one type of cryptocurrency is swapped for another. Each swap falls under the definition of a disposal. The same applies to collective investments (ie Unit Trusts) where if you switch from say an equity fund to an offshore balanced fund from the same provider, this will trigger CGT.
It should also be noted that Capital gains tax applies on formal emigration from South Africa. It also applies on death – subject to a R300 000 exclusion.
When calculating the gain for CGT on any foreign asset, exchange rates at time of purchase and sale should be taken into account.
If you donate an offshore asset to another person (unless that person is a spouse) donations tax is payable on the value of the donated asset.
Regarding taxes on different types of assets: foreign dividends are included in your gross income and any portion which is not exempt will be subject to tax at your applicable rate. You are not allowed to deduct any expenses incurred in receiving foreign dividends, such as investment fees or the costs in acquiring foreign shares.
Rental income from offshore immovable property is regarded as income from foreign trade. Any losses from foreign trade cannot be offset against local trade income.
If you have an offshore endowment policy through a local provider, SA tax is paid within the endowment at a flat rate of 30% on income and 12% on capital gains.
Finally, the issue of SITUS tax. For those South African residents holding assets directly in the UK and USA – say quoted shares or property – on death those assets will be subject to SITUS tax in the aforementioned countries and this can be onerous to say the least.
In the UK, on death any asset held there which has a value over £325 000 will be subject to 40% tax. If the asset is left to a spouse then the tax does not apply and the exemption of £325 000 is rolled over to the spouse so that on or her or his death the exemption will amount to £650 000.
In the US, the issue of SITUS tax is even more onerous. The exempt portion is only $60 000 with the balance of the value of the asset being taxed at 40%. In the US there is no spousal exemption unless such spouse is a US citizen.
Some relief may be sought locally as a credit up to 20%/25% (SA estate duty rate) may be obtained locally for SITUS tax already paid.
Clearly great care should be taken to avoid SITUS tax by ensuring as far as is possible that assets in say the UK and US are held via offshore platforms or entities.
If you want more information on the subject of tax on offshore assets please contact your Maximus adviser.
This article has been adapted from an original which first appeared in Personal Finance.