In an exciting recent development, National Treasury published a set of draft Tax and Revenue Law Amendment Bills, together with accompanying Explanatory Memorandums thereto, for public comment. These draft bills contained a host of robust proposed changes to tighten certain loopholes and inconsistencies in South Africa’s tax laws.
While many of these proposed changes focus on technical aspects of our tax regulations affecting large corporates, trusts and businesses, some amendments may very well impact South African individuals. In particular, well-to-do South Africans and their professional advisers may potentially benefit in future.
Offshore investments
Against the backdrop of a historically sluggish economy, a depreciating Rand, and social uncertainty, many South Africans have expanded their investment portfolios abroad. By including exposure to various foreign assets, many South Africans have been able to leverage beneficial arbitrage and speculative opportunities.
Whilst lucrative, South Africans with such diverse investments may discover themselves involved in a complex tax web when they dispose of their foreign assets.
Capital gains tax troubles
Since 01 October 2001, South Africans have been liable for Capital Gains Tax (CGT) which is levied on a ‘gain’ or profit derived when they dispose of an asset, whether locally in South Africa or abroad. Simply put, and in cases where a CGT liability is triggered when an individual realizes a capital gain, then 40% of the gain is included in that individual’s normal taxable income.
From there, the marginal tax rate for that individual is applied, which may be as high as 45%. Consequently, the maximum possible effective CGT tax rate equates to 18%.
When a foreign asset is disposed of, South African taxpayers may also find themselves liable for CGT in the foreign jurisdiction where their asset is situated. To curb this exposure to potential double CGT, South Africans may claim a tax credit against their local CGT liability, on foreign CGT already paid. This foreign tax credit is provided under section 6quat of our Income Tax Act, No. 58 of 1962.
Without delving into the technicalities, this rebate does have limitations in cases where foreign CGT rates are greater than the South African CGT rate, creating the possibility for a double or ‘over’ taxation of CGT, comparatively speaking. In a somewhat surprising move, National Treasury has highlighted this possible disparity in the application of the foreign tax rebate, and appears to want to mitigate the tax burden wealthy South Africans are facing under the current dispensation.
To prevent this potential CGT double tax risk, National Treasury has cited that the foreign tax rebate in its current form is not aligned with its original intention, being the prevention of double taxation. To rectify this, a clarification of section 6quat has been proposed, which may see South Africans benefiting from the ability to claim a full tax credit on foreign CGT paid.
In conclusion
The proposed amendments to the Tax and Revenue Laws offer a welcome development for South African resident taxpayers, particularly those with significant offshore investments.
By addressing the potential for double taxation on capital gains, National Treasury’s proposed clarification of the foreign tax credit provisions is a positive step towards ensuring a fairer and more equitable tax regime.
For wealthy South Africans navigating the complexities of global investments, this change could provide much-needed relief and reinforce confidence in their financial planning strategies. As these changes progress through the legislative process, it will be crucial for taxpayers and their advisors to stay informed and prepared to take advantage of the potential benefits.
Richan Schwellnus | Tax Attorney | Tax Consulting SA | mail me |
Related FAQs: Foreign tax credit and rebates for South African taxpayers
Q: What is a foreign tax credit?
A: A foreign tax credit is a tax relief mechanism that allows taxpayers to reduce their tax liability on foreign income by claiming a credit for foreign taxes paid to another country.
Q: How can I claim the foreign tax credit?
A: To claim the foreign tax credit, you need to report the foreign taxes paid on your tax return, typically using forms provided by the South African Revenue Service (SARS) and provide necessary documentation to support your claim.
Q: What types of foreign taxes can qualify for the foreign tax credit?
A: You can claim a credit for foreign taxes on income that you have paid to a foreign country, including income tax, withholding tax and other taxes that directly impact your foreign income.
Q: What is the difference between a foreign tax credit and a rebate?
A: A foreign tax credit directly reduces the taxpayer’s South African tax liability based on foreign taxes paid, whereas a rebate is a refund or reduction of tax liabilities that may not be directly tied to foreign income.
Q: How does double taxation affect foreign income?
A: Double taxation occurs when the same income is taxed by both South Africa and a foreign country. Claiming the foreign tax credit can help mitigate this issue by providing relief for the foreign taxes paid.
Q: Are there any tax treaties that affect foreign tax credits?
A: Yes, tax treaties between South Africa and other countries can impact foreign tax credits by defining the right to tax and may provide additional tax relief or reduced rates on foreign taxes.
Q: What should I consider when determining if I qualify for the foreign tax credit?
A: To qualify for the foreign tax credit, you must have paid foreign tax on foreign income, be a tax resident of South Africa and your foreign tax must be paid in respect of foreign taxes on income that is taxable in South Africa.
Q: How does the section 6quat credit work?
A: The section 6quat credit allows South African taxpayers to claim a credit for foreign taxes paid on foreign income, ensuring that the total tax paid does not exceed the South African tax liability on that income.
Q: What are the latest tax news updates regarding foreign tax credits?
A: It’s important to stay updated on the latest tax news regarding foreign tax credits, as regulations and procedures may change, impacting how taxpayers can claim the foreign tax credit or rebates.
Q: What will happen if I fail to claim the foreign taxes I paid?
A: If you do not claim the foreign taxes you paid, you may end up paying higher taxes in South Africa on your foreign income, as you will not receive the necessary tax relief that the foreign tax credit offers.
