After last month's in-depth look at the South African Tax Amnesty, draft regulations proposing a ser...
After last month's in-depth look at the South African Tax Amnesty, draft regulations proposing a series of amendments to the South African tax and exchange control rules were issued on 16 August 2003 for public comment. The proposed amendments are designed to clarify some areas of doubt within the main rules that had led to reluctance on the part of many to take advantage of the amnesty.
Among the proposals, the following amendments will be of interest to advisers:
(a) Currently, the amnesty does not technically apply to donations to discretionary trusts from South African assets where the assets were donated after being transferred outside South Africa. For example, an individual may have transferred funds to a foreign bank account and then donated the funds to an offshore discretionary trust. This would not qualify for the domestic tax amnesty under the current rules.
The proposals will amend the act to ensure that transactions of this type will qualify for the domestic tax amnesty.
(b) If a person has a foreign asset that is being used as security for a foreign debt, they would currently be required to pay the Exchange Control Levy on the market value of the asset, with no relief for the underlying debt. It is proposed that the debt will be allowable as a deduction from the market value of the asset. Individuals will be unable to borrow against the asset now, however, as the relief will only apply to amounts owing as at 28 February 2003.
(c) Foreign assets held within foreign discretionary trusts are covered by the amnesty only to the extent that they were donated to the foreign trust. This means that no account can be taken of assets that have been sold and/or replaced with others, or of any growth on those assets. The draft regulations propose that replacement assets and subsequent growth are fully included within the amnesty.
(d) The domestic levy provides relief primarily from the two main domestic taxes - income tax and donations tax. There was doubt as to whether the 2% levy could apply twice to the same capital. For example, undeclared income could subsequently have been donated to a discretionary trust, creating two domestic tax violations. The draft amendments will ensure that the 2% levy will only apply once in relation to the same capital amount.
(e) In relation to foreign discretionary trusts, the amnesty currently only applies to donations made directly by individuals, whereas in fact many gifts were made indirectly through controlled South African companies. The proposed amendments will extend the amnesty to such donations where a company made the donation upon the direction of the individual.
(f) The current rules would not allow an individual who transferred funds offshore through a South African company to apply for amnesty unless he and/or his relatives owned all of the shares. In fact, in many instances funds were transferred by companies that had multiple, unrelated individuals. The draft amendments propose to treat all the applicants as one applicant for the purposes of the amnesty.
(g) Several other amendments were proposed in relation to discretionary trust assets, including clarification on the base cost of assets, the tax character of the assets, and clarification governing deemed disposals of assets.
The above amendments are only several of those in the draft regulations that are designed to encourage more individuals to apply for the amnesty.
Another point worth noting is that information provided by the amnesty unit implied that gains between 1 October 2001 and 28 February 2003 were effectively exempt in respect of future disposals. It appears that this has been corrected, in that disposals after 1 March 2002 are calculated by reference to the market value at 1 October 2001 (unless time apportionment is used).
This article contains general information only and is not intended to be taken as specific investment or tax advice and is based on the assumption that further information would be required and provides only a guide to some of the relevant routes that an intermediary could cover in advising the client.
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