Is the accounting of your offshore investments tax efficient?

by | May 30, 2022 | Tax

Tags: Income tax
Reading Time: 3 minutes
income tax

SARS delivered on its Budget 2021 promise to create the High Wealth Individuals (HWI) unit to specifically target income tax compliance of so-called “High Net Worth Individuals”. The unit was created in 2021 and gained further impetus with the appointment of experienced Chartered Accountant (SA), Ms Natasha Singh, to spearhead the strategic imperatives of the unit.  The unit is directly focused on income tax compliance of taxpayers identified as of high net worth and is staffed by skilled individuals capable of understanding and dissecting complex tax structures that are generally associated with offshore interests of such taxpayers.

The HWI trend is to invest offshore
The developments at SARS come in the wake of a sharp increase noted over the past decade in a (growing) number of high-net-worth individuals seeking to spread their financial and liquidity risks by diversifying their offshore investment portfolios. Whilst diversification makes sense, an inherent and unintended income tax risk attaches from the structures selected to host these offshore assets.

Whereas South African residents are correctly using SARS approved structures in their personal capacities or via offshore trusts and/or entities, the accounting for these investment structures, if not correctly done, gives rise to this income tax risk.

Where does the South African income tax risk lie?

Examples of how these risks arise include:

  • Donations Tax could trigger in the case of interest-free loans to offshore entities.
  • Historically capitalized foreign trust fund reserves may be taxable in the hands of the South African beneficiaries upon receipt of distributions from the entities concerned, depending on the historical nature of the distributed reserves.
  • South African residents could be liable for income tax on their participation in a CFC (Controlled Foreign Entity), depending on the types of shareholding and percentages held by South African residents and their related parties in offshore entities.
How to avoid these risks
Most high-net-worth South Africans, with diversified offshore holdings, use offshore accountants for the compilations of the Annual Financial Statements of their offshore entities.  Offshore accountants potentially lack the local income tax knowledge of their South African counterparts, resulting in compilations with potentially limited use when it comes to SARS reporting obligations.  Because South African residents are taxed on their worldwide earnings, it stands to reason that the accounting and tax matters of these offshore investment structures should be overseen by a local professional to ensure an efficient income tax outcome for the South African resident taxpayer.
The MMS Group specializes in financial statement compilations and associated South African income tax aspects.  If your offshore investment strategies incorporate direct investments in foreign entities, reach out to your MMS Group lead for professional advice on potential income tax exposures for you. 

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