Tax

FACTS
I am a South African Citizen and tax resident. I have a residency permit for New Zealand. I will be in New Zealand for more than 184 days and 60 days continues in each of the next 12 month periods. The Remainder of the 5 odd months will be spent in South Africa. I will keep a place of abode in South Africa. For that entire period I will be an "Employee" of a South African company. (or a non independent contractor). I will be working for them, from New Zealand, over the internet on their computers in South Africa. I expect to be paid in South Africa.

Questions
(a) What are the Tax implications of this situation?

(b) Will I be liable for income tax in South Africa?

(c) Will I retain Tax Residency status in South Africa?

Answers
(a) Tax residents are liable for tax in South Africa on worldwide income and capital gains. However, where remuneration is derived for services rendered outside South Africa for and on behalf of an employer for a period of 184 days of which 61 days are continuous, such remuneration may not be taxable in South Africa in terms of section 10(1)(o)(ii) of the Income Tax Act, No. 58 of 1962.

(b) To the extent that the criteria of section 10(1)(o)(ii) are not met, the employer is obliged to operate the normal PAYE rules. It is also important to consider whether the 5 months back in South Africa will be spent working. If these are workdays back in South Africa, the portion of the income relating to this period may be subject to tax in South Africa.

(c)Unless an individual decides to formally emigrate or takes up tax residence status in another country, he or she will remain resident for tax purposes in South Africa.

FACTS
I worked for (still do) an International company in South Africa for 20 years. During my employment in South Africa, I begun contributing to a Pension fund, however sometime later, employees were given the option to convert to a Provident fund, which I did. The employee contributions to the old Pension fund were after employee tax, which changed when we converted to the Provident fund. This, I believe allows me about R300 000,00 tax free. Whilst on assignment in Europe, my salary was paid via the SA division of the company and I continued to be a contributing member of the Provident fund. However, due to the International tax agreement between SA and many other countries, I paid income tax in Europe. For the five year period, I declared a NIL tax return in South Africa. All money earned, even interest from Bank investments in SA were taxed in Europe.

At the end of the 5 year period I transferred to the European division of the company and therefore had to exit the SA provident fund. I transferred the funds to a Preservation provident fund in SA. I am now thinking of withdrawing from the fund due to possible new tax legislation, which I believe may come into effect in 2009. The fund value is about R3 250 000.00

Questions
(a)
What would my tax commitment be ? I believe that it should be a flat 18 percent because my SA tax over the last 7 years has been 0 Percent.

(b) Is there a difference in the tax calculation when you withdraw from a provident fund versus actually retiring (i.e age 55 and above)?

(c) (Curved ball). As I am tax resident in Europe, should I not be taxed in Europe on this amount, as per the International agreement. This is the case with any other money earned in SA.

Answers
(a)
The taxable portion of the lump sum will be taxed in terms of section 5(10) of the Act at the higher of the taxpayer's average rate of tax in either the tax year in which the lump sum payment accrues to him or the previous tax year. If no income was declared for the past year and current year of assessment, 18% is assumed the tax rate to be applied.

(b) Pre 1 October 2007, the tax-free portion of a lump sum was determined by, amongst others, the number of years of membership of the member in the fund and with regard to pension and provident funds, his or her average salary over a pre-determined period and limited to a maximum of the greater of R120 000 or R4 500 multiplied by the number of completed years of membership to the fund. The tax on the taxable portion of the lump sum was then determined in accordance with section 5(10) at the so-called “average rate of tax”. In terms of revised legislation, the calculation of the tax-free portion has been simplified. Post 1 October 2007, the tax-free portion of the lump sum on retirement is to be calculated as follows:

  • R300 000 plus own contributions not allowed as a deduction previously and LESS tax-free portions in previous years.
  • Essentially, the tax burden at retirement date is reduced by the tax-free portion calculated as R300 000 plus.

(c) If you are regarded as a tax resident in Europe, you would have ceased residence status in SA. However, in terms of certain Double Tax Agreements (DTA's), it is generally specified that the pension or annuity will be taxable where it accrued. However, it is worth exploring the relevant DTA to ascertain the correct treatment.

FACTS
I am living in Taiwan and have been outside South Africa for 1.5 years now. At present I don't intend to return to South Africa any time soon as I am pursuing business opportunities and earning a living here. I am also a Taiwan resident.

Questions
To my knowledge, I qualify as a non resident as I am not an ordinary resident and I don't pass the residence test. Is that correct?

My second set of questions relates to income and capital gains tax:

I have significant holdings of South African shares that I have held for several years. I buy and sell using a South African broker and transfer money with my South African bank account. I also do spread trading using Global trader and Dealstream platforms. Most spread trading instruments are however international indices and commodities. My understanding is that non residents only pay CGT on immovable property or in South Africa. Are my shares subject to CGT if I sell them? Do I avoid CGT if I lose my residency?

I also read that Income tax is payable for "South African source income".Do my spread trades (all short term in nature) qualify as "South African source income" and are they subject to Income tax?

Answers
For tax residence status, one needs to be either ordinarily resident (considers South Africa to be the place to return to from his/her wanderings) or resident in terms of the physical presence test (generally in the 6th year of being physically present, he/she may trigger residence status).

In order to be regarded as a non-resident for tax purposes, an individual must formally emigrate from South Africa based on his/her intention not to return to South Africa as his/her permanent home. This event triggers a CGT event as on the date he/she ceases to be regarded as a resident of South Africa, he/she is deemed to have disposed of his/her worldwide assets at market value and deemed to have reacquired the assets at market value. This is known as an “exit charge”. Excluded from this calculation is immoveable property located in South Africa as CGT is payable when the disposal takes place.

Residents are liable for tax on their worldwide income and capital gains. Non-residents are only liable for tax on South African sourced income, irrespective of where the income is paid. This will include gains made from the disposal of property situated in South Africa.

If you are regarded as being a “trader” ins hares, it ,may be likely that income tax and not capital gains tax becomes payable. A detailed analysis should be conducted to ascertain the treatment SARS is likely to apply.

Either income tax or CGT will be payable on disposal of the shares.

FACTS
I have recently emigrated to the UK and have elected to invest my blocked assets into a business venture and thereby contribute to the countries prosperity by trading with these funds in RSA. To achieve this I sold my total undeveloped property portfolio into a closed corporation of which I am the sole member, on a loan account, and intended to develop my properties in the cc and remit the distributed dividends and the interest of my loan, from ongoing developments,overseas.

Questions
I have found that the RSA tax law frowns on this "venture/development capital" initiative and ensures that the blocked funds be brought back into the personal name of the emigrant and that these funds then be invested in the limited opportunities as set out in "The Manual" whereby interest from investments are still able to be remitted offshore but no trade may be conducted.

Tax Legislation ensures that it is not viable for the blocked funds of an emigrant to be utilized by a his closed corporation to trade by:
(a) ensuring that VAT on the sale of properties from the emigrant into (his) closed corporation are not able to be recouped as output VAT by the closed corporation until the emigrant has received full payment of his loan. The net result is that the emigrant can trade in the cc, but with 14% of his investment locked in with the VAT office, until such time the emigrant settles the loan account with his myself, in which case the funds are back in his personal blocked account and unable to be employed for development.
(b) Interest on the emigrants loan to the cc is not deductible as a cost before tax in the cc as the emigrant is deemed to be a connected/related party so this interest is not remittable by the emigrant. (Section 10(1)h)

I would appreciate your comment on my interpretation of the Act as it would appear to me as a great opportunity has gone begging for blocked funds to be employed as venture capital and job creation in the Republic.

Answers
(a) In terms of section 9(3)(d) of the VAT Act, the supply of fixed property shall take place on the earlier of transfer at a deeds office or payment of such consideration. As such the CC that buys the property will only be able to claim an input tax deduction when full payment of the loan is made, as the property would have been purchased on loan account. For the sale of the property by the individual, the timing will take place on the earlier of receipt or issue of an invoice. Thus, transfer duty will be payable immediately by the CC, whilst input tax will only be claimable at a later stage, thus resulting in an unfavourable mismatch of cash flows.

(b) The exemption of the interest income in terms of section 10(1)(h) will not be applicable to the individual as the business of the cc in SA will be seen as a permanent establishment carried out by the emigrant in SA. Even if the interest was exempt in terms of section 10(1)(h), the deductibility of the interest in the hands of the cc must not be looked at in terms of section 10(1)(h), as section 10(1)(h) looks at the taxability of interest income in the hands of the emigrant. The deductibility of interest in the hands of the cc needs to be looked at in terms of section 11(bA) interest incurred by a taxpayer to acquire an asset, including property, should be claimed in the year of assessment when the asset is brought into use by the taxpayer for the purpose of his/her trade. The interest of the CC is therefore tax deductible as it may be regarded as being incurred in the production of income, but will be deductible in the year of assessment in which the building/development is brought into use for the purpose of trade.

FACTS
I was hoping you could help me please. I am a structural engineer and have been made a offer to go work in the Seychelles on a big project for; a year. The employer says that I would be paid tax free, and the money would be paid in rands into my normal South African FNB account.

Question
What are the rules for working overseas and earning money there, but the money is paid into your SA bank account? The employer is a south African engineering firm doing the design work on the project. They need someone on site to keep an eye on things.

Answers Assuming you are regarded as a tax resident of South Africa, you are liable for tax on your worldwide income and capital gains in South Africa. However, where remuneration for services rendered outside South Africa is earned, there may be a possibility to exempt from South African tax the income derived for such services, subject to certain prescribed requirements as follows:

You will need to be physically outside South Africa for a period of 184 days in any twelve-month period of which at least 61 days must be continuous.

Note this exemption is applicable, irrespective of whether the salary is paid into an SA bank account.

Passive income (interest/rental/foreign dividend income) will still be subject to South African tax and filing of annual tax South African returns remain mandatory.

FACTS
I am currently working out of SA in Angola and I am paying Angola Tax on my salary.

Questions
Am I still liable to be taxed on the monies earned in SA? I do receive a Payslip which indicate tax amount deducted from my salary.

Answers
Assuming you are regarded as a tax resident of South Africa, you are liable for tax on your worldwide income and capital gains in South Africa. However, where remuneration for services rendered outside South Africa is earned, there may be a possibility to exempt from South African tax the income derived for such services, subject to certain prescribed requirements as follows:

You will need to be physically outside South Africa for a period of 184 days in any twelve-month period of which at least 61 days must be continuous.

Note this exemption is applicable, irrespective of whether the salary is paid into an SA bank account.

FACTS
I have been offered a Limited Duration Contract in the DRC. The package is tax-free.

My wife and kids will remain in SA and I will work for eight weeks and get one week off and flown home.

I don't know how long this will continue. The package is R120k/m

Questions
Will I have to pay tax on this if my money is deposited into a SA bank account?

Answers
Assuming you are regarded as a tax resident of South Africa, you are liable for tax on your worldwide income and capital gains in South Africa. However, where remuneration for services rendered outside South Africa is earned, there may be a possibility to exempt from South African tax the income derived for such services, subject to certain prescribed requirements as follows:

You will need to be physically outside South Africa for a period of 184 days in any twelve-month period of which at least 61 days must be continuous (section 10(1)(o)(ii)). Based on the fact you will be away for 8 weeks at a time and will return to South Africa, it is unlikely that you will meet these days' requirements. Consequently, the income derived will be subject to South African tax. Additionally, if you are regarded as a contractor and not an employee (detailed analysis must be done here), this exemption will not be applicable. However, as a tax resident of South Africa, you will be in a position to claim relief against double taxation by claiming a foreign tax credit (of the taxes paid in Angola). However, the employer in South Africa may need to obtain formal acceptance from SARS to apply the net of foreign tax credit basis on a monthly basis.

Note this exemption is applicable, irrespective of whether the salary is paid into an SA bank account.

FACTS
I am planning to move to Australia next year after 21 years service, I expect the value of my Pension to be 3.5 million

Questions
How can I move this money across with paying the minimum amount of tax? Do I pay tax at my normal rate 40% or can I put it in a preservation fund for two years and pay tax at a lower rate. I have just turned 50,would early retirement be a option?

Answers
The taxable portion of the lump sum will be taxed in terms of section 5(10) of the Act at the higher of the taxpayer's average rate of tax in either the tax year in which the lump sum payment accrues to him or the previous tax year. If no income was declared for the past year and current year of assessment, 18% is assumed the tax rate to be applied.

Pre 1 October 2007, the tax-free portion of a lump sum was determined by, amongst others, the number of years of membership of the member in the fund and with regard to pension and provident funds, his or her average salary over a pre-determined period and limited to a maximum of the greater of R120 000 or R4 500 multiplied by the number of completed years of membership to the fund. The tax on the taxable portion of the lump sum was then determined in accordance with section 5(10) at the so-called “average rate of tax”. In terms of revised legislation, the calculation of the tax-free portion has been simplified. Post 1 October 2007, the tax-free portion of the lump sum on retirement is to be calculated as follows:

  • R300 000 plus own contributions not allowed as a deduction previously and LESS tax-free portions in previous years.
  • Essentially, the tax burden at retirement date is reduced by the tax-free portion calculated as R300 000 plus.

However, upon retirement from the Fund, tax will be applied in accordance with prescribed tax tables, the highest rate being 36% versus the average rate of tax over 2 consecutive tax years (which if planned may be at a rate of 18%). It is therefore worth doing a calculation to determine the respective tax values.

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