OFFSHORE TRUSTS BY ANTON MASKOWITZ, FIDUCIARY & TAX SPECIALIST

Many South African taxpayers are unaware of the tax consequences of emigration. Here’s what you need to know.

Beyond penalties
Gone are the days when emigration was reserved for the entrepreneurs and the not so faint-hearted. In terms of current emigration rules, a South African exchange control resident can upon formalising his emigration, externalise all of his South African wealth without any exchange control penalties. The 10% levy was, in line with the exchange control relaxation policy, abolished on 5 November 2010.

But this is not where it ends. Many a South African taxpayer is blissfully unaware of the tax consequences of emigration.

Natural person rights

The Reserve Bank: Relaxing exchange control policies

In terms of our tax legislation, when a natural person ceases to be a tax resident, there is usually a nasty surprise in the form of a capital gains tax charge. Our legislation deems a natural person who has ceased to be a tax resident to have disposed of all his worldwide assets (except for fixed property or an interest in fixed property located in South Africa) on the day that he ceases to be a tax resident.

In line with the Reserve Bank’s exchange control relaxation policy, natural persons can now externalise up to R5 million per calendar year and use this for investment purposes abroad. It is therefore not uncommon for many South Africans to diversify a large part of their asset base by using this foreign investment allowance dispensation. When it comes to emigration, one of the criteria to enable a person to externalise local assets is that the assets (apart from SA listed shares) must be realised, as only cash proceeds may be remitted abroad from SA on emigration. This generally triggers a capital gains tax event anyway so many would ask, “What is the big fuss all about?”

Direct offshore investments
The reality is that most emigrants who already have direct offshore investments don’t have to realise their offshore assets as part of the emigration process. However, SARS will treat these assets as being realised and the unrealised gain will then be subject to capital gains tax. If the individual formed a discretionary offshore trust and subsequently loaned the foreign funds to the offshore trust after the funds were remitted abroad, his foreign assets at time of emigration would no longer be the investments, but the loan due from the trust denominated in the foreign currency. Since the abolition of capital gains tax on such related currency gains, the loan in effect has no further capital gains tax effect.

For example:
In order to provide for current and future generations, Mr C Lever formed an offshore trust a few years ago. He and his wife diligently externalised the full value of their foreign investment allowances over the years and placed that in trust via a loan mechanism. Given that all their children have
moved abroad, they have decided to emigrate in order to be closer to their children and grandchildren.

The current value of the outstanding loan is GBP 1,250,000. The trustees in turn made use of very capable investment managers and the current value of the assets in trust has grown to GBP 1,750,000. With careful structuring, no SA capital gains tax has yet been triggered in SA on the growth element of the investment.

If Mr Lever did not form a trust and they owned the offshore assets in their personal capacity, the full GBP 500, 000 gain would have been subject to capital gains tax on the date of emigration, amounting to a 13.3% charge on the ZAR equivalent of GBP 500,000 (roughly R866,000).

Given the stellar performance and unanticipated tax savings, it was no surprise Mr Lever had no problem with the trustees charging their well-deserved annual trustee fees.

This article was taken from Mastermind, the official monthly newsletter of Sanlam Private Investments, a division of Sanlam Ltd. Issue 49, September 2011. Visit the SPI Website