South African resident taxpayers with undisclosed assets abroad will undoubtedly recall the 2016 Budget announcement on February 24 2016 to introduce a special voluntary disclosure programme (SVDP). The measure intends to provide further relief to taxpayers, encouraging them to regularise their tax and exchange control affairs before the commencement of the new global standard for the automatic exchange of information, which will start in September 2017.
The revised draft bills, published on July 20 2016, may come as a relief to many resident taxpayers who are anxiously waiting for some certainty regarding how their tax and exchange control transgressions will be treated in terms of the SVDP.
A few significant changes have been made to the draft bills since they were first published to simplify the scheme. The following changes and additions are notable:
The definition of a trust has been widened to include a foreign trust;
The additional tax relief offered will apply in respect of years of assessment ending on or before February 28 2015;
All undeclared amounts, such as interest income, dividends and rental income derived from an offshore asset held during the period between March 1 2010 and February 28 2015 will be exempt from tax if disclosed under the scheme;
Taxpayers will be subject to tax on 50% of the highest value of the aggregate of all offshore assets between March 1 2010 and February 28 2015. This is the market value of the assets determined in the foreign currency and converted to South African Rand at the spot rate at the end of each year of assessment; and
Taxpayers who previously held undisclosed assets that were disposed of before March 1 2010 may also apply for the relief, subject to special deeming provisions.
The application of the above changes can be illustrated by the following example: In 2008, Mr X opened a bank account in the US into which he transferred $1 million. Mr X has earned a total of $250,000 in interest on that bank account since inception and during the period between March 1 2010 and February 28 2015. In terms of the revised draft bills, the interest earned during the period from March 1 2010 to February 28 2015 will be exempt from tax. Further, 50% of the highest amount of his bank balance between the period of March 1 2010 and February 28 2015 will be subject to tax. Assuming that this amount is ZAR 15 million ($1.1 million), then in terms of the revised bill only ZAR 7.5 million will be included in his taxable income and taxed at the marginal rate.
The revised bills may still seem punitive for taxpayers who hold offshore assets that are worth a considerable amount of money. However, the benefit of submitting a SVDP application far outweighs the risk of being caught by the South African Revenue Service (SARS). A successful application to the scheme guarantees that SARS will not levy understatement penalties or pursue criminal prosecution against the taxpayer. According to SARS and the National Treasury, taxpayers who do not make use of the programme will “face the full force of the law”. SARS will be entitled to levy tax for the entire period that the taxpayer under-declared their taxable income (as opposed to levying tax for the period from March 1 2010 to February 28 2015 only). The taxpayer will also incur understatement and non-compliance penalties and may face criminal prosecution for any statutory offence arising from the non-disclosure.
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South Africa Revenue Service, Krugersdorp Branch |
The revised draft bills come a week after the Financial Surveillance Department (FinSurv) released a circular outlining the details applicable to the exchange control aspect of the SVDP.
The draft bills have not yet been finalised and the public has been invited to submit additional comments on the proposals. The deadline for submissions is August 8 2016. The first parliamentary hearing on the bills is expected to be held in mid-August 2016.
Although the draft bills are still at the public consultation stage, the effective date for the SVDP remains unchanged. Thus, taxpayers still have the very limited period between October 1 2016 and March 31 2017 to file their applications to make use of the special voluntary disclosure programme. This compliance window is unlikely to be extended. SARS and the National Treasury are therefore working on a tight schedule and resident taxpayers will have to wait and see if the bills will be finalised by the scheme’s effective date of October 1 2016. Until then, taxpayers can only hope that they are not selected by SARS or FinSurv for an audit or investigation into their contraventions of the tax legislation and exchange control regulations. Should this occur, it is unclear whether taxpayers will be excluded from the SVDP.
This article was written exclusively for International Tax Review by Lebo Motsumi, associate at Norton Rose Fulbright in Johannesburg.
