Tax break for South Africans with offshore assets

The National Treasury has proposed clarifying the country’s foreign tax credit provisions, which should prevent double taxation on capital gains for South Africans with foreign assets.

This is according to Tax Consulting SA tax attorney Richan Schwellnus, who said this development is a positive step towards ensuring a fairer and more equitable tax regime.

Schwellnus’ comments come after the National Treasury recently published a set of draft Tax and Revenue Law Amendment Bills and accompanying Explanatory Memorandums for public comment. 

These draft Bills contain a host of robust proposed changes to tighten certain loopholes and inconsistencies in South Africa’s tax laws.

While many of these proposed changes focus on technical aspects of South Africa’s tax regulations affecting large corporations, trusts, and businesses, some amendments may impact South African individuals.

In particular, he said that well-to-do South Africans and their professional advisers may potentially benefit in the future.

“Against the backdrop of a historically sluggish economy, a depreciating rand, and social uncertainty, many South Africans have expanded their investment portfolios abroad,” he explained.

“By including exposure to various foreign assets, many South Africans have been able to leverage beneficial arbitrage and speculative opportunities.”

Over the last seven years, foreign investors have sold R710 billion of South African equities, and local investors have recently joined in by investing an increasing share of their portfolios outside the country. 

Following the National Treasury’s decision to allow pension funds to invest up to 45% of their assets offshore, billions of rands worth of local assets have been sold in favour of offshore investments. 

The average Regulation 28-compliant fund now holds just 39% of South African equities, compared to nearly 70% eighteen years ago.

Whilst lucrative, Schwellnus warned that South Africans with such diverse investments may discover themselves involved in a complex tax web when they dispose of their foreign assets.

Since October 2001, South Africans have been liable for Capital Gains Tax (CGT), which is levied on a ‘gain’ or profit derived when they dispose of an asset, whether locally in South Africa or abroad. 

Simply put, and in cases where a CGT liability is triggered when an individual realises a capital gain, then 40% of the gain is included in that individual’s normal taxable income. 

From there, the marginal tax rate for that individual is applied, which may be as high as 45%. Consequently, the maximum possible effective CGT tax rate equates to 18%.

He explained that when a foreign asset is disposed of, South African taxpayers may also find themselves liable for CGT in the foreign jurisdiction where their asset is situated. 

To curb this exposure to potential double CGT, South Africans may claim a tax credit against their local CGT liability on foreign CGT already paid. 

However, Schwellnus said this rebate does have limitations in cases where foreign CGT rates are greater than the South African CGT rate, creating the possibility for a double or ‘over’ taxation of CGT, comparatively speaking.

“In a somewhat surprising move, National Treasury has highlighted this possible disparity in the application of the foreign tax rebate and appears to want to mitigate the tax burden wealthy South Africans are facing under the current dispensation,” he said.

To prevent this potential CGT double tax risk, the National Treasury has cited that the foreign tax rebate in its current form is not aligned with its original intention – the prevention of double taxation. 

To rectify this, the Treasury proposed clarifying the Tax Act section that allows for foreign tax credits. This may allow South Africans to claim a full tax credit on foreign CGT paid.

Schwellnus said the proposed amendments to the Tax and Revenue Laws offer a welcome development for South African resident taxpayers, particularly those with significant offshore investments. 

“By addressing the potential for double taxation on capital gains, National Treasury’s proposed clarification of the foreign tax credit provisions is a positive step towards ensuring a fairer and more equitable tax regime,” he said. 

“For wealthy South Africans navigating the complexities of global investments, this change could provide much-needed relief and reinforce confidence in their financial planning strategies.” 

“As these changes progress through the legislative process, it will be crucial for taxpayers and their advisors to stay informed and prepared to take advantage of the potential benefits.”