Brutally honest Magnus Heystek BNC#5

Exchange Control shock: SA Treasury in “silent but violent” move – just as Heystek warned

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By Magnus Heystek*

Exchange controls are back!

In a sudden and almost totally unexpected move, the Treasury last week — just before the long weekend and without any consultation – introduced a new regime for South Africans either emigrating financially or wanting to use the R10m annual investment allowance.

In one fell swoop, described by some tax consultants as “silent but violent”, Treasury now deems financial emigration and the application for the annual R10m allowance to be the same thing, calling it an International Approved Transfer (IAT) with the same, complicated and intrusive process to be followed before permission will be given.

Some of these requirements are now so extreme and impractical that many taxpayers will walk away and use other ways (legal and illegal) to build up some offshore capital.

For instance: SARS now requires proof of the taxpayer’s WORLDWIDE assets and, at COST, a new and challenging requirement to fulfil. Moreover, most investors with some offshore portfolio — either shares, endowments or properties — will likely have built this up over decades, so the chances of them having all the documentation plus sources of capital is virtually non-existent.

Some tax practitioners had called Treasury’s move the end of the R10m annual investment allowance. In contrast, others say it is the end of the financial freedoms South African taxpayers had gradually experienced since 1997 when the first steps were taken to loosen Exchange Control’s screws.

The Apartheid Government introduced restrictions on citizens being able to move their money to stop capital flight after Sharpeville in 1961.

Now forex controls are back in their complete, brutal and invasive form. These new regulations were introduced to stem the massive outflow of capital from South Africa, significantly since the maximum allowance was increased to R10m per person per year.

It has been clear for some time now that the flow of money out of SA has been much more significant than was expected, especially since 2015, when wealthy families could take out R11m per year for each registered taxpayer. Since then, it was not uncommon for well-heeled families to take out the maximum allowed each year.

Even SA’s large asset managers were starting to feel the pain, as most have experienced heavy and steady outflows, according to the public accounts of some (Coronation) and deductive analysis of the other prominent institutional players.

During my keynote at the most recent Biznews investment conference in the Drakensberg (BNC#5 in early March), I warned — as I have been for several years now — that a change in the ANC govt approach to the free flow of capital can change overnight—which it currently has. You can watch the keynote below:

Treasury’s actions have now confirmed Magnus Heystek’s warning at BNC#5

Wealthy investors who have not externalised some or all of their wealth since 1995 will now be forced to fall back onto the annual R1m allowance per family member over 18. As it is, the dollar value of that yearly rand remittance has steadily declined from around $90 000 in 2015 to the current $54 500.

For parents with a child studying at an offshore university – like myself – this is barely enough to make ends meet.

Thomas Lobban, head of Cross Border Tax at Tax Consulting SA, was first out of the block with comments on these new changes. As it so happened, Tax Consulting SA had a webinar scheduled for last week Wednesday, literally hours after the new rules were published. The webinar attendees were clearly greatly concerned by these new rules, which were already in effect.

Lobban writes: “It may come as a surprise to many that tax and exchange control go hand in hand in terms of South African law. A person who is a “resident” for tax purposes is entitled to transfer up to R1 million abroad before they need pre-approval for any further amounts during a calendar year. A “non-resident”, however, needs pre-approval for every cent that is transferred abroad in a calendar year.

“This generally means that regardless of whether a person is a “resident” or a “non-resident”, they may, at some point, need to obtain a Tax Compliance Status (or “TCS”) Pin from SARS. This is issued when SARS approves the transfer of relevant funds abroad.

“Beforehand, SARS made provision for an “Emigration” TCS Pin and for a “Foreign Investment Allowance” (“FIA”) TCS Pin. The former would apply to a person transferring funds out of South Africa following their South African tax residency cessation. The latter would apply in all other cases involving funds transfer out of South Africa.

“These are now, effectively, the same, dubbed an “Approval for International Transfer” or “AIT”.

Slimmed down, beefed up process.

The AIT Pin is now the go-to requirement for approving funds out of South Africa, i.e., more than R1 million for a tax resident and every cent for a person who has ceased to be a tax resident per year. This one document replaces the different approvals that were previously needed, simplifying things from this perspective. Still, the extent of information and documentation required by SARS is far, far more involved and extensive.

The first vital disclosure in the SARS form is whether the taxpayer is considered a “resident” or a “non-resident” for South African tax purposes. Where “non-resident” is selected, SARS will require that a Notice of Non-Resident Tax Status (i.e., a “non-resident confirmation letter”) be supplied.

Beyond this, before getting to the finer details that SARS requests, three more questions are asked of the taxpayer, i.e., regarding trust beneficiary status, shareholding in companies, and any loans to trusts. If you fall at this first hurdle, hang on to your seat.

Count your chickens

Previously, taxpayers who applied for either an Emigration or FIA Pin from SARS must disclose their local assets and liabilities for the previous three years. Now, taxpayers are required to disclose both their local as well as their foreign assets and liabilities to SARS.

In the Local Assets & Liabilities section of the form, SARS outlines no fewer than 19 mandatory fields about different asset categories, spanning from fixed properties to crypto assets right through to livestock. This is closely mirrored in the Foreign Assets & Liabilities section of the form.

It is also worth noting that every asset listed in the Local and Foreign Assets & Liabilities forms must be allocated a value at cost. This is subject to further verification by SARS in each case. Therefore, capturing the relevant information incorrectly may lead to delay, if not other complications, either regarding the application for the AIT Pin or further down the line with SARS.

Perhaps, please remember to count your chickens, lest you incorrectly disclose this item to SARS. Another new requirement is a request to the taxpayer for the sources which the value arose from. This, too, is subject to SARS verification and must be carefully selected. SARS provides nine different ” source ” types for selection and a further option for “other” sources. Additional information will also be required for each source of an amount to be transferred.

Enhanced oversight and enforcement

Since the 2020 Budget speech National Treasury has been promising to strengthen the tax treatment in respect of taxpayers with foreign interests, inclusive of a “more stringent verification process” and the triggering of a “risk management test” that includes the “certification of tax status and the source of funds”.

Perhaps now spurred on by the recent and abrupt grey-listing of South Africa by the Financial Action Task Force in February this year, this silent-but-violent change to the TCS Pin request requirements has nevertheless come as a bolt out of the blue. Even South African authorised dealers (i.e., banks) seem to have been caught unawares by this sudden change.

However, the introduction of robust new disclosure requirements by SARS is not entirely out of left field. Last year, in an event held by the South African Institute of Taxation, in collaboration with Standard Bank and Tax Consulting SA, Natasha Singh from SARS’s High Wealth Individuals Unit affirmed that SARS would seek to “enhance voluntary compliance” and at the same time detect taxpayers “who do not comply” and “make non-compliance hard and costly” for them.

These comments, read with SARS’s Strategic Plan for the 2021 to 2025 tax years, indicate that this forms part of its larger project to “[d]evelop and implement an enhanced methodology to detect and select non-compliance.”

This paradigm shift in the TCS requirements further affirms that SARS focuses on the wealth of taxpayers, locally and abroad, and the basic standard of living for those seeking to emigrate or transfer their wealth offshore financially. Either way, this may now be a mainstay of the compliance burden that rests on taxpayers, and they must be sure to tread lightly.

Perhaps it is evident, based on the extent of the information SARS now requests, taxpayers are cautioned to measure twice and cut once regarding the disclosures made to SARS for the AIT Pin. “

Conclusion

For SA investors without offshore investments, the signs must be as transparent as daylight. They need to move their annual investment allowances as soon as possible and do so every year.

As it is, the local asset managers are already bumping against the 45% offshore limitations and have started imposing curbs on some of their offshore feeder funds. However, the effective scrapping of the R10m investment allowance — which in many cases ended up being invested with global investment companies — could see a resurgence in local investors using current asset swap capabilities, which might not last long.

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