In April, The Davis Tax Committee (DTC), which reviews and makes recommendations on South Africa’s tax system, issued a report urging the country’s revenue service to investigate the taxation of offshore retirement funds.
Speaking to International Adviser, Hall, whose firm provides international personal pensions such as Rops and Qnups, warns that the DTC advice may limit the shelf-life of current offshore pension products.
“Following the DTC report there are concerns surrounding the longevity of the current retirement funds that South Africans are taking advantage of.
“It appears that the recommendations of the Davis report may prompt changes by South African Revenue Service (SARS) to address pension products that avoid both donations and wealth tax,” he said.
Pension or discretionary trust?
The committee’s main concern is that despite being billed as overseas pensions, such products may be being used by domestic tax residents as discretionary trusts in a bid to avoid paying tax in South Africa.
Most notably, offshore retirement funds are exempt from the 20% estate duty which applies to assets with a net value in excess of ZAR3.5m (£205,538, $251,159, €230,831), including all worldwide assets.
Such funds are also exempt from donations tax, an IHT charge of 20% on gift payments over ZAR100,000.
“This arrangement, in the view of the committee, represents a concealment of the true arrangement between the SA taxpayer and the offshore trust/retirement fund.
“The true arrangement is that the taxpayer has a vested interest in both the capital and income of the offshore trust/retirement fund,” said the DTC in its report.
Tax changes
Hall predicts that SARS may bring in reforms which would treat money withdrawn from offshore pension funds by an domestic tax resident as taxable income.
“Technical analysis shows that a pension product that provides the member with a vested interest in the assets of the scheme is consequently subject to wealth tax. Having this vested right ensures the product is a pension and not a vehicle to avoid tax,” he explained.
In addition, during it’s analysis, the DTC also highlighted that such income could also be subject to the estate duty tax.
“As such, the income of the arrangement is taxable in the hands of the SA resident taxpayer and the capital should be included in the estate duty computation.
“Alternatively, if the true arrangement between the parties is indeed a donation, it should be subject to 46 donations tax and the income deemed to be that of the SA taxpayer in terms of section 7(8),” recommended the DTC in its report.
Crackdown on trusts
However, Rex Cowley, co-founder of Guernsey-headquartered Overseas Trust & Pension, said that despite the DTC warnings about offshore pension funds, it’s still unlikely that “anything will change”.
