It may be the last chance for taxpayers to regularise their tax and exchange control affairs in terms of the window of opportunity afforded by the Tax and Excon Special Voluntary Disclosure Programme (SVDP). Applications for relief under the SVDP operated by SARS and the South African Reserve Bank close on 31 August 2017. The SVDP gives rise to a myriad of questions posed by taxpayers given the uncertainties surrounding the consequences that may follow from such application. We unpack the essence of the relief to provide practical insights below.
What is SVDP?
The SVDP allows taxpayers to regularise past non-compliant fund externalisations. The SVDP allows a window period of opportunity from 1 October 2016 until 31 August 2017 for non-compliant taxpayers to regularise their tax and exchange control affairs relating to their offshore assets and income.
What is Permanent VDP?
To encourage taxpayers to regularise their tax affairs, the Tax Administration Act, 2011 (the TAA) introduced a permanent voluntary disclosure relief programme. Unlike the SVDP which covers a period of 5 years (i.e. 2011 to 2015 tax years), the permanent VDP has no prescription period. As a result, SARS may extend the scope of its investigation or audit beyond 5 years.
Who may apply for SVDP?
In terms of the SARS Guide: Special Voluntary Disclosure Programme (v1.2), the following taxpayers may apply for SVDP relief:
- Individuals and companies;
- Settlors, donors, and beneficiaries of foreign discretionary trusts (including deceased estates) if they elect to have the trust’s offshore assets and income deemed to be held by and accrued to them.
Eligibility for a deceased estate to apply for SVDP
The Income Tax Act No, 1962 (the ITA) defines a “person” to include the estate of a deceased person. The ITA introduced a dispensation that creates a new income tax record for a deceased estate for deaths on or after 1 March 2016. Consequently, a deceased estate is regarded as a separate taxpayer.
Are there any exclusions?
Specific circumstances disqualify taxpayers from SVDP relief. These include if (i) SARS obtains information under the terms of an international exchange of information procedure; or (ii) all or part of the seed money/subsequent deposits/funding of foreign assets are not taxable in, or have already been taxed, in South Africa.
What relief is obtained by applying for SVDP?
Income tax relief is granted to taxpayers by exempting from income tax, receipts and accruals that were not previously declared to SARS. In other words, income tax is foregone in respect for returns on investments or capital/assets that was situated outside SA during the period 1 March 2010 to 28 February 2015 (i.e. the 2011 to 2015 tax years for individuals). The relief will result in 40 per cent of the highest market value of the aggregate of all foreign assets held outside South Africa at the end of each year of assessment ending on or after 1 March 2010 and ending on or before end February 2015 (i.e. the 2011 to 2015 tax years), to be included in the 2015 taxable income of the individual. If the maximum marginal rate of 40% for the 2015 tax year applied to an individual, the undisclosed assets will be taxed at an effective rate of 16 per cent. If the taxpayer successfully applied (prior to an investigation or audit by SARS), the taxpayer will not be subject to understatement penalties. Administrative non-compliance penalties will also be waived (excluding penalties for the late submission of a return).
Successful applicants will be liable to pay an exchange control levy based on the market value of the assets held on 29 February 2016 that contravened the Exchange Control Regulations. The levies are as follows:
- 5 per cent of the value of the unauthorised assets or sale proceeds of foreign assets repatriated to South Africa;
- 10 per cent of the value of the unauthorised assets of foreign assets retained abroad. The levy must be paid from foreign sourced funds;
- 12 per cent of the value of the unauthorised assets of foreign assets retained abroad if the levy is not paid from foreign sourced funds; and
- If assets are held in multiple foreign currencies, the levy may be paid in United States Dollar, based on the conversion rates on 29 February 2016.
How does this all work in practice?
Mr X, a South African tax resident, was employed by a Swiss entity from 2007. He rendered services mainly in South Africa for the Swiss Firm and his salary was paid into a Swiss bank account. Mr X did not repatriate the funds to South Africa (and does not intend to do so), nor did he declare the income on his personal income tax return. Mr X is not under investigation. Mr X was taxed at the maximum marginal tax rate of 40 per cent. The value of the undisclosed foreign income was as follows:
- 2011 tax year – CHF 60 000
- 2012 tax year – CHF 55 000
- 2013 tax year – CHF 72 000
- 2014 tax year – CHF 75 000
- 2015 tax year - CHF 69 000
- Market value of assets held on 29 February 2016 – CHF 73 000
Does Mr X qualify to apply for SVDP?
- Is Mr X a resident of South Africa?
- Is Mr X a foreign accountholder?
- Does Mr X hold undisclosed foreign bank accounts?
- Did Mr X externalise funds without obtaining the necessary exchange control approvals?
Given that these questions can all be answered in the affirmative, and Mr X did not disclose the remuneration he derived for services rendered in SA to SARS, Mr X will qualify to apply for the SVDP.
The highest value of the foreign assets was at the end of the 2014 tax year when the market value was CHF 75 000. The market needs to be converted to South African Rand using the spot rate on 28 February 2014. The spot rate on 28 February 2014 was R12.21/CHF.
Income Tax Calculation:
Spot rate R12.21/CHF
|Highest market value
||CHF 75 000
|South African Rand value
||ZAR 915 750
|40% Inclusion Rate
||ZAR 366 300
|Tax payable to SARS
Exchange Control levy
As Mr X will not repatriate the funds to South Africa, the levy will either be:
- 10 per cent of CHF 73 000 (the market value of the unauthorised assets held on 29 February 2016) if the levy is paid from the foreign sourced funds; and
- 12 per cent of CHF 73 000 (the market value of the unauthorised assets held on 29 February 2016) if the levy is not paid from foreign sourced funds.
What would the implications be if Mr X received the funds in his Swiss bank account from an offshore inheritance from his late mother?
The pertinent question here is whether Mr X contravened the Exchange Control regulations. In extent, did he inappropriately externalise funds from South Africa? As these funds were received from an offshore inheritance it is unlikely that Mr X contravened exchange control regulations. The return on investment (i.e. interest or dividends) should be subject to tax in South Africa.
Is Mr X eligible to apply for relief in terms of the SVDP or permanent VDP?
As no exchange control regulations have been contravened and the inheritance is not subject to income tax in South Africa, Mr X may apply for VDP relief.
Why is it important to use this window of opportunity?
South Africa has adopted the global standard for the Automatic Exchange of Information, and financial information will be shared with South Africa from across the globe, and vice versa. If SARS starts with an audit or investigation into a taxpayer’s affairs before application for relief, the taxpayer will lose the opportunity to apply for SVDP/VDP relief.
How must the application for SVDP be lodged?
Taxpayers must lodge applications in the prescribed format containing the required supporting documentation and declarations.
What are some of the examples of supporting documentation that will be required?
The following are examples of supporting documentation that will be required:
- Cash held abroad - Description and value of cash held on 29 February 2016.
- Bank accounts, call deposits or term deposits/short-term foreign assets – Original or certified copy of the statement of account on 29 February 2016 from the foreign institution concerned.
- Financial instruments listed on a recognised stock exchange (e.g. shares, stock, bonds or debentures) – Original or certified copy of a statement of account and price of the financial instruments as quoted on the exchange on February 2016.
- Unlisted financial instruments – Valuation certificate from a foreign valuator on 29 February 2016.
- Fixed property – a valuation certificate issued by a real estate agent or by a sphere of government of the country where the foreign asset is located on 29 February 2016.
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