Monthly Archives: August 2016

Talk all about emigration and taxation

: My son has been working in Hong Kong for the last nine years. He remitted R3 million to South Africa over a few years to build a property here. He has not emigrated formally and has not submitted any tax returns to the South African Revenue Service (Sars) for nine years.

In 2008, my son requested that his tax practitioner contact Sars to terminate his tax number as he was going overseas. He was under the impression that all was in order. He has a bank loan of R3 million in South Africa, secured by a property worth R6 million. He tried to repatriate some of the funds back to Hong Kong but Sars would not issue a clearance certificate. He also tried to apply for a clearance certificate to invest the R2 million offshore but Sars insisted on him submitting tax returns for the last nine years. He has since applied for and been granted a Hong Kong passport and has relinquished his South African residency and citizenship.

As he is no longer a South African resident or citizen, we would like to know how his property investment in South Africa will be treated, i.e. will this investment and his funds be blocked in South Africa forever, or will he be permitted to move some funds out the country in future without having to submit tax returns to Sars for the past 9 years?

A: South African taxes are based on residency, which becomes extremely important when determining what taxes are due. Although your son has relinquished his South African passport and citizenship in favour of Hong Kong and no longer resides in SA, he has a property in SA and remains a registered taxpayer with the South African Revenue Service and has not formally emigrated. Sars views this as “world-wide wanderings” with the intention to return to South Africa at some stage. The fact your son purchased a property in South Africa whilst in Hong Kong reaffirms this.

Your son would need to look at the South African residency test  –“ordinarily resident” which must be interpreted under our common law and suggests that you are “ordinarily resident” in the place you would regard as your permanent “home” … the place you would tend to return to after your world-wide wanderings. Therefore if you left SA with the intention to come back after a period of time, you would still be “ordinarily resident” in South Africa and subject to world-wide tax in South Africa, no matter how long you lived “temporarily abroad”.

Reader question answered about pension fund or RA

Q: I am a 54-year-old male member of the Transnet Pension Fund. I recently responded positively to my employer’s advice for increasing monthly premiums. I have realised that Sars does not consider pension fund contributions for tax relief when submitting yearly returns. I am therefore thinking of reversing my decision, rather increase my Retirement Annuity, which I have with a financial institution, for tax returns purposes.

Please advise if it is a right decision.

A: As of March 1 last year, irrespective of whether you have a pension, provident or retirement annuity (RA), you will qualify for a tax deduction of up to 27.5% of your taxable income (subject to a maximum of R350 000 per year). This limit applies to the total contributions you make to all retirement funds in the tax year.

Prior to March 1 2016, members could get a deduction of up to 7.5% on their own contributions, and no deduction on their employer contribution. Post 1 March 2016, you will now pay fringe benefit tax on the employer contribution, but at the same time get a deduction on both your own and your employer’s contribution by way of a reduction in taxable income, subject to the limits referred to above. This will leave you in the same position as before March 1 2016, as long as your contribution is below the limits mentioned above. By increasing your contribution to the employer pension fund, you get the benefit of the effective tax deduction monthly and you won’t have to wait until you file your tax return (as is the case if you contribute to your own RA).

I would advise you to speak to someone in your HR/payroll department as you should be receiving the full tax deduction for the total contributions if they are below the limits mentioned above. Any contributions in excess of these limits will be carried into the next tax year.

Available to avoid sale of assets

The death of a spouse, friend or relative is often an emotional time even before estate matters are addressed.

And truth be told, death can be an expensive and cumbersome affair, particularly if estate planning was neglected, the claims against the estate start accumulating and there isn’t sufficient cash to settle outstanding debts.

People generally underestimate the costs related to death, says Ronel Williams, chairperson of the Fiduciary Institute of Southern African (Fisa). Most individuals have a fairly good grasp of significant expenses like a mortgage bond that would have to be settled, but the smaller fees can also add up.

To avoid a situation where valuable assets have to be sold to settle outstanding debts, it is important to do proper planning and take out life and/or bond insurance to ensure sufficient cash is available, she notes.

Costs

The costs involved in an estate can broadly be classified as administration costs and claims against the estate. The administration costs are incurred after death as a result of the death. Claims against the estate are those the deceased was liable for at the time of death, the notable exception being tax, Williams explains.

Administration costs as well as most claims against the estate will generally need to be paid in cash, although there are exceptions, for example the bond on the property. If the bank that holds the bond is satisfied and the heir to the property agrees to it, the bank may replace the heir as the new debtor.

Williams says quite often estates are solvent, but there is insufficient cash to settle administration costs and claims against the estate. In the event of a cash shortfall the executor will approach the heirs to the balance of the estate to see if they would be willing to pay the required cash into the estate to avoid the sale of assets.

If the heirs are not willing to do this, the executor may have no choice but to sell estate assets to raise the necessary cash.

“This is far from ideal as the executor may be forced to sell a valuable asset to generate a small amount of cash.”

If there is a bond on the property and not sufficient cash in the estate, it is not a good idea to leave the property to someone specific as the costs of the estate would have to be settled from the residue. Where a particular item is bequeathed to a beneficiary, the person would normally receive it free from any liabilities. This could result in a situation where the beneficiaries of the residue of the estate may be asked to pay cash into the estate even though they wouldn’t receive any benefit from the property, Williams says.

The most significant administration costs are generally the executor’s and conveyancing fees.

Collecting more tax revenues by stealth

Over the last few years government has collected a significant amount of tax revenue by not fully adjusting the personal income tax tables for inflationary increases in earnings, thereby increasing the effective tax rate of individuals.

A middle-class individual earning a taxable income of R400 000 per annum in the 2016 year of assessment, would have seen her after-tax income increase by only 5.42% and 5.05% in the 2017 and 2018 tax years respectively, even if her taxable income increased by 6% every year.

During his most recent budget speech, finance minister Pravin Gordhan collected more than R12 billion of the R28 billion in additional taxes he needed from the personal income tax system in this way.

In a similar fashion, taxpayers may now become liable for capital gains tax (CGT) purely because three of the exclusions have not been adjusted for the effects of inflation since March 1 2012.

1. The primary residence exclusion

When taxpayers sell their primary residence and realise a capital gain on the transaction, an exclusion of R2 million applies.

Louis van Vuren, CEO of the Fiduciary Institute of Southern Africa (Fisa), says if the exclusion was adjusted for inflation over the past five years, it would have increased to around R2.6 million over the period.

For someone who bought an upper middle-class house in Cape Town for R650 000 in 2002 and who wants to sell it now, this has significant implications.

Van Vuren says today the house would be worth roughly R3 million. If it were sold, the capital gain realised would amount to R2.35 million (assuming no capital improvements and a base cost of R650 000). Due to the primary residence exclusion, R2 million would be disregarded, and 40% (the inclusion rate for individuals) of the capital gain of R310 000 (after deduction of the R40 000 annual exclusion) would have to be included in the individual’s taxable income.

At an assumed marginal income tax rate of 41%, the individual would have to pay R50 840 in CGT, purely because the primary residence exclusion hasn’t been adapted for inflation, he adds.

2. The year of death exclusion

Apart from the primary residence exclusion, the South African Revenue Service allows for a capital gain exclusion of R300 000 on all other assets in the year of an individual’s death (instead of the normal R40 000 annual exclusion). Personal use assets like artwork, jewellery and vehicles do not attract capital gains tax.

Van Vuren says if someone had invested R250 000 on the JSE in March 2009 in the wake of the financial crisis and it kept track with the performance of the All Share Index, the investment would have grown to roughly R700 000.

Since the individual would be deemed to have disposed of the investment upon death, the capital gain would amount to R450 000, which would reduce to R150 000 after the R300 000 exclusion had been deducted.

Van Vuren says if the exclusion kept track with inflation it would have been around R400 000 today and the gain would be only R50 000 (R700 000 minus R250 000 minus R400 000).

At an inclusion rate of 40%, the R100 000 “additional gain” that had been realised will add R40 000 to the individual’s taxable income, which, at a marginal tax rate of 41% would lead to R16 400 in CGT, purely due to inflation.

3. Special exclusion for small business owners

Van Vuren says because the retirement provision of small business owners are often locked up in the value of their companies, it would be quite harsh to levy capital gains tax in the normal way when they dispose of their interest in the business upon retirement.

As a result, small business owners receive a special capital gains exclusion of R1.8 million upon retirement (minimum age 55 years) or death, subject to certain conditions (and over and above the R40 000 annual exclusion):

  • The individual must own at least 10% of the business;
  • The total business assets of all businesses the person is involved in must not exceed R10 million;
  • The individual must have been actively involved in the business for at least five years;
  • If at retirement, the disposals must all happen within a 24-month period.

If the exclusion had been adjusted for inflation, it would have been roughly R2.3 million by now, Van Vuren says.