Tax change could hit South Africans with spouses living abroad

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JEREMY MAGGS: Now, I read that a long-standing tax exemption for transfers between spouses could soon be restricted, but only where the spouse receiving the assets is no longer a South African tax resident. Now let me try and explain.

National Treasury says some couples are exploiting the exemption by transferring substantial wealth to a non-resident spouse before the second partner emigrates. That would sharply reduce the capital gains exit tax.

So let’s explain to you who’s exposed and whether maybe Treasury has gone a little too far in this respect. I’m going to talk to tax attorney at the Leap Group, Reinert van Rensburg, a very warm welcome to you.

In your analysis, is Treasury closing a genuine tax avoidance loophole, or, as some are suggesting, maybe penalising people simply because their spouse lives abroad?

REINERT VAN RENSBURG: Jeremy, firstly, thanks for having me. Treasury did make it clear that they want to introduce this change specifically for wealthy taxpayers who are exploiting a loophole whereby a resident spouse is donating assets to a non-resident spouse simply to avoid the exit tax.

But in reality, within the Income Tax Act is already a rule applied to those types of donations.

When a resident spouse donates assets to a non-resident spouse, it already triggers a capital gains tax (CGT) at that point, because the rollover relief does not apply to that transaction, whereby a resident spouse donates to a resident spouse that the recipient spouse moves into the shoes of the donating spouse with the same base cost or same market value of the same asset.

But that changes when a resident spouse donates to a non-resident spouse.

There’s no rollover relief available, then the resident spouse is deemed not disposing those assets into the open market. So that triggers the capital gains tax in itself.

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JEREMY MAGGS: What kind of tax then could a resident spouse face when transferring assets to that non-resident partner?

REINERT VAN RENSBURG: Firstly, it will trigger that CGT, as we mentioned. But with the new law amendment they want to apply donations tax to that same transaction as well.

It will essentially result in a compounding tax … A lot of people are referring to it as a double tax, but at the end of the day, it’s two different types of taxes being levied.

So it’s just a compounding tax resulting in a higher tax burden.

I did give it quite a lot of thought as to why Treasury want to introduce this change, and what makes the most legal sense to me is maybe regarding the estate duty base in South Africa, because as soon as assets leave the South African tax net into the hands of a non-resident and that non-resident passes away, the estate duty is not levied on most of those assets.

It might have something to do with estate duty itself, because that’s the main purpose of donations tax, is to avoid a situation where an individual transfers their wealth just before they pass away, just to avoid estate duty.

That’s why the donations tax is there to be applied before you pass away and to avoid the estate duty itself.

JEREMY MAGGS: How common is this practice of transfer, then? I’m assuming Treasury wouldn’t be moving on this unless there was a trend here.

REINERT VAN RENSBURG: Yeah, so we have seen it on numerous occasions in practice.

But in my case, I advise my clients to simply remain subject to the Section 9(H) deemed disposal because Section 9(H)b also triggers the exact same taxes on that transaction if you donate to a non-resident spouse.

Whether you donate the assets to a non-resident spouse or keep it in your own name, when ceasing tax residency, both those types of transactions will result in the same deemed disposal being treated, essentially, if we take a look at the correct wording within the Income Tax Act.

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JEREMY MAGGS: Are there legitimate transfers that could be caught in this net? I’m thinking of things like, family support or maybe even the movement of assets that have been jointly accumulated.

REINERT VAN RENSBURG: Yes, they can be. The tax law change is focusing on targeting wealthy taxpayers avoiding a loophole.

But at the end of the day, it will also apply to ordinary South Africans having to transfer assets to spouses abroad while they are non-resident for specific purpose. It can have a negative impact on those ordinary South Africans, even though they are targeting wealthy taxpayers who are trying to [use] a loophole.

JEREMY MAGGS: Does Sars (South African Revenue Service) not, though, already have sufficient anti-avoidance powers to challenge an artificial arrangement without changing the exemption for everyone?

REINERT VAN RENSBURG: Yes, absolutely. As mentioned, Section 9(H)b is one of those anti-avoidance rules that can be applied to make sure that the exit tax is not avoided. That specific section, I believe, was already introduced in 2019.

So when a resident spouse donates the assets to a non-resident spouse, the exit tax is triggered in any case. So that’s the type of avoidance rule already being applied.

It’s very interesting to see them trying to introduce a donations tax change on the same transaction, which actually covers a different type of purpose relating to estate duty.

JEREMY MAGGS: Is there the risk that a couple could face tax in the country where the non-resident spouse lives? If I’m following my own thread here, that surely could create a double tax problem.

REINERT VAN RENSBURG: Not really a double tax problem, because if we take a look at donations tax specifically, it’s always levied to the donor. It’s subject to the donor’s residency status, where the donor is considered an ordinary resident and the funds are being received on the other side in the non-resident country, but it’s all subject to the country where the person is residing as well.

But in a general sense transaction, there won’t necessarily be any tax consequences on the non-resident side, simply receiving a donation from an individual in another country.

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JEREMY MAGGS: If I understand this correctly, the draft was published months after the proposed effective date, correct me if I’m wrong. If that’s the case though, is it legally and ethically acceptable to impose a tax retrospectively?

REINERT VAN RENSBURG: Yes, they did introduce the possible amendment or comments on it in the budget speech in February already.

Now this draft bill was introduced months later, actually providing the exact wording that will be enacted, and they want to apply retrospectively from February already. Any transactions that happen in the meantime, the donations tax will apply to those transactions as well.

It’s difficult to comment on fairness itself because on the one side, Treasury needs to protect the South African tax base, but they also need to ensure certainty to taxpayers as well.

So there’s certainly a raise of concern when it comes to fairness and legal certainty.

But then again, Treasury needs to make sure that they prevent a situation where taxpayers run to ensure they take certain transactions just before legislation is enacted. That’s why these types of policy changes are introduced quite suddenly.

JEREMY MAGGS: Just a final one. Should affected couples then – give us some advice here – should they pause transfers immediately, or do they need to get some kind of professional advice before acting in any way?

REINERT VAN RENSBURG: Based on the current wording of the proposed amendment, I would say the resident spouses need to avoid donating assets to non-resident spouses because you don’t want to be subject to that unnecessary donations tax if this is enacted into legislation.

I would definitely say avoiding that transfer itself because, as mentioned, that transfer does trigger its own capital gains tax.

There’s no real difference between donating your assets to a non-resident spouse to avoid exit tax, in comparison to keeping it in your name and just go through with the exit tax itself, it has the same effect from a tax perspective, essentially.

JEREMY MAGGS: From the advisory group, the Leap Group, Reinert van Rensburg, tax attorney, thank you very much indeed for the explanation. I appreciate your time.

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