Special trusts are taxed at the rates applicable to individuals, but are not entitled to any rebate. The 40% inclusion rate for a taxable capital gain applies to both types of special trusts and 80% inclusion rate for normal trusts.

A special trust is one created:

• solely for the benefit of a person affected by a mental illness or serious physical disability which prevents that person from earning sufficient income to maintain him/herself. Where the person for whose benefit the trust was established dies prior to or on the last day of the year of assessment the trust will no longer be regarded as a special trust;
• as a testamentary trust established solely for the benefit of minor children who are alive and related to the deceased on the date of death. Where the youngest beneficiary turns 18 years of age prior to or on the last day of the year of assessment, the trust will no longer be regarded as a special trust.

What is Section 7C?

Section 7C is an anti-avoidance provision designed to prevent avoidance of both donations tax and estate duty through low or no interest loans granted to trusts.

Implications of section 7C?

SARS will deem the interest foregone, on a loan to a trust where the interest is less than the official interest rate, as a donation. This donation is deemed to be made on the last day of the year of assessment of the trust and will be subject to donations tax.

The lender must be either a connected natural person, or a company who granted the loan at the instance of that natural person. This applies to all loan account balances on or after 1 March 2017.

The provision does not apply to loans granted to a trust for the purchase of the lender’s or the spouse’s primary residence.

The official interest rate is linked to the repurchase rate plus 1% and is published on the SARS website. The most recent changes are as follows:

(Unless otherwise stated, financial years ending on any date between 1 April 2020 and 31 March 2021)

Small Business Corporations (annual turnover of R20 million or less):

Micro-business (elective presumptive turnover tax for qualifying annual turnover of R1 million or less)*:

* Qualifying micro-businesses are entitled to pay turnover tax, VAT and employees’ tax twice a year.

In the case of a taxpayer who is not an individual, exempt donations are limited to casual gifts not exceeding R10 000 per annum in total.

Donations between companies forming part of the same group of companies and donations to certain public benefit organisations are exempt from donations tax.

A provisional taxpayer is any person who earns income by way of remuneration from an unregistered employer, or income that is not remuneration, or an allowance or advance payable by the person’s principal. An individual is not required to pay provisional tax if he or she does not carry on any business, and the individual’s taxable income:

• Will not exceed the tax threshold for the tax year; or
• From interest, dividends, foreign dividends, rental from the letting of fixed property, and remuneration from an unregistered employer will be R30 000 or less for the tax year.

Provisional tax returns showing an estimation of total taxable income for the year of assessment are required from provisional taxpayers.

Deceased estates are not provisional taxpayers.

Estate duty is levied on the dutiable amount of a deceased estate (property of residents and SA property of non-residents). Deductions include: a standard abatement of R3.5 million per estate (R7 million for a married couple) and certain other deductions, the most important of which is the deduction for property accruing to a surviving spouse.

Paid on acquisition of immovable property where the transaction is not subject to VAT. Transfer duty is also payable on the acquisition of residential property through an interest in a company or trust. The rates of duty are as follows:

Foreign remuneration has experienced quite a lot of attention in the past 3 years. What was originally a full exemption under Section 10(1)(o)(ii) is now limited to R1.25 million from 1 March 2020 following Tito Mboweni’s 2020 Budget Speech. This comes after the initial amendment which was promulgated in December 2017 that capped the exemption at R1 million. These changes have caused numerous South Africans to cut ties with the country and it now appears that the government aims to change their approach.

Although it appears that this may bring relief to South African tax residents abroad, the additional R250 000 is mainly wiped out by the effect of the weakening Rand and fringe benefits which will inflate their total package.

Government has proposed to phase in a new exchange control treatment as from 1 March 2021 which is also aimed at reducing the increasing emigration rates. We will see a new verification process with regards to remuneration earned abroad and offshore transfers which allows identical treatment of natural person emigrants and natural person residents.

In December 2017, the change to the foreign employment income exemption was promulgated into law. This has widely become known as the “expat tax”. The exemption at that point was capped at R1 million, meaning that South African tax residents earning foreign employment income above this threshold would no longer be exempt from tax in South Africa, from the effective date of 1 March 2020.

Stakeholders Warned Government

At every point from the proposal of the amendment to the expat tax, to the promulgation of it into law, and thereafter at various workshops
with National Treasury, stakeholders pleaded with government and warned in no uncertain terms that implementing this change in legislation would lead to an accelerated cessation of tax residency.

The response from government at that point was that the formalization of non-residency in those cases was to be encouraged. This view was shortsighted and has come back to haunt government as South Africans have in many cases chosen to financially emigrate and thus cease their tax residency with South Africa to avoid the expat tax.

South Africa Scrambles to Keep Its Expats

In the 2020 Budget Review, there is a desperate attempt to change the mind of those South African’s formalizing their non-resident status by increasing the exemption cap to R1.25 million. This is of course welcome, but a little too late. The increase will unfortunately assist with only a small group of South Africans working abroad, and merely dangles a carrot for the rest of those abroad to entice them to remain within the South African tax net. The big issue which has been raised on numerous occasions with government is the issue of fringe benefits, which in many cases deplete the exemption before one even considers the cash component of their salary to be taxed.

Financial Emigration – Has it Changed the Minds of Government?

As there has been a massive increase in South Africans ceasing residency to avoid the change in legislation, government has taken notice. The current loss of revenue and potential future loss with South Africans continuing to cease residency means that the expat tax has backfired before it has even become effective.

Government has announced that they will remove some of the emigration formalities from an exchange control perspective, which will take effect from 1 March 2021. These exchange control formalities will be replaced with an uncertain future regime which leaves South Africans with 12 months of some semblance of certainty and to get their affairs in order before a new regime is put in place.

Specifically mentioned is that, “government wants to encourage all South Africans working abroad to maintain their ties to the country.” This must be viewed with some skepticism as government asking a taxpayer to keep ties with the country, and knowing how South African tax residency works, would lead to an attempt to keep the taxpayer within the tax net, while still defending the punitive expat tax.

Government has confirmed that tax residency will still be determined as per South African case law and legislation, being the ordinarily resident test and physical presence test – this comes as no surprise, but does show that government understands that it needs to hold on to its South Africans abroad to ease a flailing tax base. In theory, the financial emigration exit process will in future change from a SARB exchange control perspective, but remains as is from a SARS tax perspective.

Offshore Bank Accounts Beware

With the Common Reporting Standards in full swing, having a hidden offshore bank account is a “luxury” of the past, as information is being shared with revenue authorities around the world. Government has again shown interest hereon by noting that “cooperative practices will remain in place to ensure that South African tax residents who have offshore income and investments pay the appropriate level of tax.”

The simple truth remains that taxpayers must assume any bank account in their name will eventually be known to SARS, so remaining compliant is key while ensuring you are not caught when SARS “asks” about all your world-wide bank accounts.

A Desperate State, it is Too Late

While we can welcome a small increase to the expat tax threshold, as well as hopefully lesser exchange control restrictions for the future, the issue remains – the expat tax is, and will continue to be, disadvantageous for the South African tax resident, as well as for the South African tax base. The tide of South Africans making up their mind to “divorce” South Africa fiscally, formally letting government know their intentions to leave the fiscal net, will probably not be impacted by Budget 2020. To the contrary, it may cause an accelerated effect, as the taxpayer has until 01 March 2021 to exit under a formalized dispensation.