The latest change in terms of the Taxation Laws Amendment Act means repatriated income or capital gains will be taxed. Financial journalist Amanda Visser writes for Moneyweb that this amendment to the taxation of foreign trusts will have far-reaching effects on the distribution of income and capital gains to South Africans. It could even mean that more wealthy South Africans can decide to leave the country.
According to tax executives, it will push South Africans with a large asset base offshore to join their assets rather than repatriating them and paying the huge tax sums. The amendment kicked in on 1 March this year already.
Vissier quotes Baker McKenzie’s legal and tax experts Matthew Tout and Arnaaz Camay who told her these changes came as a result of a push by the legislature to close identified loopholes associated with foreign trusts and seek to regulate SA resident individuals who have an indirect interest in a foreign company through foreign trusts.
Keith Engel, CEO of the South African Institute of Tax Professionals, says SA allowed for a “participation exemption” in 2002 to be internationally tax-competitive. This exemption meant that if a South African tax resident owned shares in a foreign company, they were exempt from tax on dividend and capital distributions.
The European and British legislature allowed for a participation exemption so as not to discourage their tax residents from repatriating money from a foreign source. “In the US they are taxing the money that is coming home, so people tend to keep it offshore longer,” says Engel, who was at National Treasury in 2002 when the participation exemption was introduced.
SA followed the European and British models, but this has now changed. All distributions from a foreign trust to a South African tax resident made after March 1 will now be taxed.
But the fear is now the wealthier people will increasingly take the decision to leave the country. Tax laws often push people over the edge. In the words of Engels: “People say tax became the turning point for them…if they are already half in and half out, the tax aspect pushes them to leave.”