Now that South African residents can invest overseas — within certain limits — you might think income or capital gains earned in far corners of the Earth will escape the South African Revenue Service’s searching eye.
This gleaming idea may be dangerous for your financial health, suggests a recent edition of PriceWaterhouseCooper’s Synopsishalf newsletter.
Since the beginning of 2001 South Africa has had a residence-based tax system which, broadly, taxes residents on worldwide income and — since October 2001 — on capital gains. Simultaneously, exchange-control relaxations have enabled residents to make significant overseas investments.
There is now a duty to disclose overseas income and assets, falling on individual investors, traders, partners, company directors and close corporation members.
To assist the South African Revenue Service (Sars) secure its whack of tax, Section 78(1) of the Income Tax Act allows it to issue estimated assessments. This applies either where the taxpayer has defaulted in issuing a return or where Sars is not satisfied with the return or the information furnished. “Default” means a misrepresentation or omission.
Section 78(1A) is a new amendment aimed at non-disclosure of a resident’s foreign income or capital gains, which is triggered where the commissioner “has reason to believe” a resident has not declared or accounted for funds in a foreign currency or assets held outside South Africa.
In estimating their value, Sars may use any information, including knowledge of funds that were transferred over- seas under the R750 000 foreign investment allowance.
Bob Williams, of the University of KwaZulu- Natal’s law school, says it is “implicit that information is now being transmitted to Sars by the Reserve Bank”.
Sars may also compare the foreign income disclosed with the taxpayer’s foreign investments.
It may take into account the time that has elapsed since the funds were sent abroad to calculate the increase in value.
Sars will then issue its estimated assessment, based on the assumption that the assets abroad have generated an annual income equivalent to South Africa’s official interest rate — currently 9%.
If it considers the estimate too low, it may use the general estimating provisions of Section 78(1).
What of the market reality that local interest rates are higher than in the United States or in Europe? The taxpayer may produce banking documents to prove the interest rate received.
Before Sars invokes these sweeping powers, it must give the taxpayer notice, by requesting an explanation for apparent non-disclosure or by setting out its proposed estimated assessment.
To avoid harsh procedures, notably a double penalty (the dreaded “treble tax”) for non-disclosure or false disclosure, taxpayers should make full disclosure in their returns of foreign income and the current capital value of assets abroad, including any capital gains from their disposal.
If the income is less than South Africa’s official interest rate, the return should be adequately documented without waiting for a query.
The same applies where funds abroad have been lost through a misjudged investment or spent on an overseas holiday.
The revenue authorities are more sophisticated than you think!