By Brian Butchart – Managing Director, Brenthurst Wealth

INVESTMENT REPORT – NOVEMBER 2016 – ISSUE 257

Brenthurst Wealth in conjunction with Hogan Lovells recently hosted two seminars, one in Johannesburg and one in Cape Town regarding the Special Voluntary Disclosure Programme (SVDP).

Only as recently as 1997 South African’s were allowed to officially invest abroad. But off course there are countless stories of South Africans, who for many reasons took funds offshore prior to 1997, in a variety of interesting.ways.

Since then, however, local exchange controls have become a lot more relaxed allowing for up to R10 million per annum per individual to be transferred offshore via tax clearance and R1 million per annum, via travel, studies, gifts and loans allowances.

In 2003/2004 a foreign exchange and tax amnesty was offered to individual tax payers who had transgressed the foreign exchange control and or tax regulations. This referred specifically to assets abroad without the relevant foreign exchange approvals or income which had not been disclosed to SARS for tax purposes.

It is estimated that approximately R65 billion in offshore assets owned by South Africans was declared during the 2003/2004 amnesty process. However, it is estimated that an additional R200 billion or more remains undeclared.

In the wake of sensational news like the so-called Panama Papers and a leak of documents of international bank HSBC, which exposed global tax dodgers, governments around the world have agreed to take strong action to reduce international tax evasion via offshore assets.

The new global standard on Automatic Exchange of Information (AEOI) will enable governments to recover tax revenue lost to non-compliant taxpayers, and will further strengthen international efforts to increase transparency, cooperation, and accountability among financial institutions and tax administrations. Additionally, AEOI will generate secondary benefits by increasing voluntary disclosures of concealed assets and by encouraging taxpayers to report all relevant information.

The South African government, like the G20 countries and several others, have agreed to this new global standard. The standard requires financial institutions to report information on accounts held by non-resident individuals and entities (including trusts and foundations) to their tax ad-ministration. The tax administration then securely transmits the information to the account holders’ countries of residence on an annual basis.

It is against this background that it was announced in the 2016 South African national budget that a SPECIAL VOLUNTARY DISCLOSURE PROGRAMME (SVDP) process will be available to local taxpayers with offshore assets to regulate their affairs before the AEOI comes into effect in 2017.

The SA Revenue Service (SARS) has issued a draft guide on the SPECIAL VOLUNTARY DISCLOSURE PROGRAMME, which from 1 October 2016 will offer non-compliant taxpayers an opportunity to disclose any undeclared offshore assets and income, until 30 June 2017. The initial closing date was set for March 2017, but this was extended to allow more time as in some cases the process may be drawn out.

The guide says the SVDP is intended to encourage taxpayers to come forward on a voluntary basis to regularise their tax affairs with SARS and the Reserve Bank to avoid the imposition of under-statement and administrative penalties. Relief is available in respect of all taxes administrated by SARS, but excludes duties charged in terms of Customs and Excise regulations.

SARS has confirmed that any person may apply for voluntary disclosure relief. However, a person that is aware of a pending audit or investigation, or is the subject on a not yet concluded audit or investigation, may not use the scheme.

Individuals and companies may apply. Trusts, may not. However, beneficiaries of trusts may apply provided they deem the assets and income of the trust as their own. Taxpayers with pending audits or investigations regarding their offshore assets and taxes will not qualify for relief.

THE PENALTIES WHICH WILL APPLY ARE AS FOLLOWS:
FOREIGN EXCHANGE CONTROL SVDP

– A flat 5% penalty of the value of the offshore asset as at 29 February 2016 if the transgressor transfers the asset back to South Africa;
– A flat 10% penalty of the value of the offshore asset as at 29 February 2016 if the transgressor leaves the asset offshore;

Either penalty should be paid from the offshore asset in question or if good reason is given can be paid from South African sources, in which instance an additional 2% penalty on the value of the offshore asset as at 29 February 2016 will be added to the transgressors liability.

THIS WILL REGULARISE THE FOREIGN EXCHANGE TRANSGRESSION WITH SARB.

TAX SVDP

IN ORDER TO CALCULATE THE TAX LIABILITY TO SARS THE TRANSGRESSOR WILL REQUIRE THE VALUE OF THE OFFSHORE ASSET(S) FOR THE PAST 5 YEARS ON THE FOLLOWING DATES:
– 28 February 2011
– 29 February 2012
– 28 February 2013
– 29 February 2014
– 28 February 2015

40% of the highest value of the aggregate of all assets outside South Africa between (or deemed to be between) 1 March 2010 and 28 February 2015 that were derived from undeclared income will be included in taxable income and subject to tax in the 2015 tax period.

The value referred to above is the highest market value as at the end of each tax period, in the relevant foreign currency translated to South African rand at the spot rate at the end of the tax period in which the highest value fell.

This will ensure that the undeclared income that originally gave rise to the foreign asset will be exempt from income tax, donations tax and estate duty liabilities from the past.

Please note however that each case needs to be assessed carefully to determine whether the asset is in fact in transgression of either the Foreign exchange control or Income Tax and administration act or both.

This is vitally important, as in some cases there may be no need to declare the asset and pay unnecessary penalties and taxes.