The past week was a good week for SARS, and not a good one for promoters of certain offshore financial products. SARS issued a very clear Ruling that they will strictly apply the law and sends a clear statement that taxpayers should not fall for fanciful tax benefits promised by certain promoters.
When a South African has money offshore, a primary benefit is often the hard currency that is held, and that you financially de-risk yourself against the valuation of the Rand.
This money is typically used to make some investments, and as a South African tax resident, SARS is of course interested in getting its share of the taxes hereon.
Unscrupulous Financial Products
As a top 6 tax practice, we deeply understand the importance of prudently designed and operated tax structures.
However, for every compliant structure we review; there is a magnitude of ill-conceived tax driven products. These products lack technical substance and are designed by salespeople. Promises are made of remarkable tax benefits and the sales process is smooth and like a well-oiled machine, coming with all the bells and whistles to show legitimacy and promise of a tax loophole.
SARS Rules Against Promised Tax Benefits
Last week, SARS issued a Ruling on one of these international structures in the market, that appears to be masked as a foreign pension trust. The tax benefits of the product appear to have included that –
a) you do not have to pay tax every year on the taxable events within the trust; and
b) that there is no South African estate duty on death.
The Ruling is very clear that these tax advantages are not achieved by this scheme for South African tax residents.
As with any Ruling, full facts are never published to keep taxpayer information confidential, and our practice has equally sanitised the various positive Rulings we have obtained from SARS through the years. The Ruling process is important where you want to be proactively compliant with SARS on a tax product, and as a practice, we fully support this important SARS service which creates taxpayer certainty.
However, this SARS team is not light-weight and the Ruling in question is a case study in how well National Treasury and SARS have legislated against schemes. A total of 15 different sections of tax law had to be considered as part of the Ruling.
Kissing a frog does not make it a prince
SARS made short work on the naming of the scheme as a “pension” and the arguments that it provided similar benefits as a South African approved pension fund, provident fund or retirement annuity fund. It simply, and correctly, ruled that it is not the same as so defined in section 1 of the Act. The promoter can name any construct, but that has no bearing to recognising same under South African law.
Any views that the taxpayer does not have to be taxed each year on their investment in the scheme was dispelled by involving the very powerful anti-avoidance provisions of section 7(1) of the Act. This is probably the most overlooked part of the Income Tax Act, and perhaps SARS could have enforced the provisions of this section with more vigour in the past. This may spell a change in tide.
There is a no remarkable saving for High Worth Individuals on estate duty. SARS confirmed that when an investor dies prior to the normal retirement date, the vested personal right will constitute “property”, and will therefore form part of the deceased investors dutiable estate.
When sold a Lemon
The SARS Ruling is not only very clear, but also technically correct. South Africans with similar international structures should prudently consider an independent review done on the purported tax benefits and whether they have been compliant.
There are international structures which are perfectly legal, but there are many which create significant compliance risk for their unsuspecting investor. The only way to legally correct SARS non-compliance and avoid prosecution and otherwise minimise the financial impact, is through the SARS Voluntary Disclosure Programme.
Written by Colleen Kaufmann, Tax Specialist, Admitted Attorney at Tax Consulting SA; and Monique Carvalho, Tax Attorney at Tax Consulting SA