This article is from Moneywebtax

By Dr Beric Croome

How the relief will work if you come clean.

JOHANNESBURG – With the recent announcement by the South African Revenue Service (Sars) that it plans to provide taxpayers with the opportunity to “come clean” without incurring steep penalties, interest or prosecution, MoneywebTax.co.za provides you with six scenarios …

Scenario 1:
I have R10m in foreign bank accounts, I take the  Voluntary Disclosure Programme (VDP). Can I pay the 10% levy and bring back R9m into South Africa? If I bring it back can it be put into my trust bank account or must it be declared into my personal name?

Answers to scenarios by Dr Beric Croome, a tax executive at Edward Nathan Sonnenbergs and a member of Saica’s Integritax editorial panel: Scenario 1:
Where the applicant holds R10m in foreign bank accounts and pays the 10% levy, they are not obliged to return the remaining funds to South Africa.  The VDP applicant can, therefore, choose whether to retain the funds abroad or to return them to South Africa.  If the funds belong to the VDP applicant personally, they would continue to be owned by the VDP applicant and where it is intended to transfer the funds into the trust’s bank account that would constitute a donation, which would attract donations tax at the rate of 20%, unless the funds are loaned by the VDP applicant to the family trust.

Scenario 2:
I have R10m in jewellery lying in a safety deposit box in a foreign country. I take the VDP. Do I pay 10% levy and bring it back? Can I leave it there and pay 10%? If I bring it back can it be brought back and left to my trust without paying the donation tax?

Scenario 2:
If it is assumed that the jewellery has a value of R10m at February 28 2010, the VDP applicant is required to pay a levy of 10% of the value of the assets held off-shore at February 28 2010. The VDP applicant is not required to return the asset to South Africa.  Where the assets are the property of the VDP applicant, the only manner whereby the assets can be transferred to a trust, would be either by loaning the asset to the trust, or by donating those assets to the trust against payment of donations tax of 20%.

Scenario 3:
I have R10m lying in cash in a foreign country. Not in a bank account.

Do I take the VDP and bring back R9m?

Scenario 3:
If the VDP applicant holds cash in a foreign country amounting to R10m, the 10% levy is payable on the market-value of the asset as at February 28 2010. It must be noted that the VDP applicant is not required, under the draft guidelines issued by the Reserve Bank, to return the asset to South Africa.

Scenario 4:
I have R10m held within discretionary overseas trusts managed by overseas consultants. Do I take the VDP and bring it back to my South African trusts?

Scenario 4:
Where the foreign assets are owned by discretionary trusts located abroad, the VDP applicant may apply for the relief and will be required to pay the 10% levy to regularise the assets from an exchange control point of view.  Against payment of the levy of 10%, it will be possible to retain the assets off-shore for exchange control purposes.  However, it must be noted that the VDP does not constitute an amnesty for tax purposes and there would, therefore, be an exposure in respect of the funds initially transferred into the overseas trusts, which would, in all likelihood, have been donated to the foreign trusts.  As a result, donations tax remains payable on the value of the funds donated to the discretionary overseas trusts, no interest or additional tax can be levied for the late payment of the donations tax in accordance with the VDP guidelines.

Scenario 5:
I have given R10m as loans to family members in overseas countries.

They won’t be able to pay it all back immediately. Can I take the VDP for the full balance on these loans even though they will only become due in a few years time or as the family can manage to pay back?

Scenario 5:

Where the VDP applicant has removed funds from South Africa in contravention of the Exchange Control Regulations and made those funds available to family members abroad, that can be regularised via the VDP process, against the payment of the levy of 10%.  It is important to note that the 10% levy must be settled from funds held off-shore.  Where it is not possible to pay the 10% levy from off-shore funds, it would appear, based on the draft guidelines issued by the Reserve Bank, that the VDP applicant will be able to make payment of the levy from local funds, such that the levy is then increased to a rate of 12% of the value of the foreign asset at February 28 2010.

Scenario 6:
My family has inherited land and buildings in our mother land. It is in the village in the name of the family. Should we take the VDP?

Again can it be finally disclosed in the families property trust in South Africa.

Basically I want to avoid showing whatever I have in my personal hands and would prefer to leave it in the hands of my family trusts to avoid the estate duty in my personal capacity at death, is this going to be possible?

Scenario 6:
Insofar as assets inherited from non-residents are concerned, the date on which the South African residents became entitled to the foreign inheritance is important.  Where the family inherited the land and buildings located abroad prior to 17 March 1998, the South African residents should have declared such foreign assets via an authorised dealer, that is, the Exchange Control Department of a commercial bank, to the  Exchange Control Department of SARB.  Where the South African resident has failed to declare the foreign inheritance, which was received prior to 17 March 1998, it is necessary to make a declaration, declaring the foreign inheritance before 31 October 2011.  The submission of the declaration will regularise the family’s position and allow the retention abroad of the inherited land and buildings.  In these cases, no administrative levy is payable.  It is not possible to summarily transfer the foreign property inherited from abroad to a family trust in South Africa, as that would result in donations tax at the rate of 20% becoming payable on the value of the property transferred from the resident to the family trust.

General:
Where the VDP applicant owns the assets offshore, it is not possible to transfer those assets to a domestic trust without donations tax becoming payable where the ownership of the assets are transferred from the VDP applicant to the family trust.  Thus, where the assets are owned by the VDP applicant, they will constitute part of the applicant’s estate for estate duty purposes.  It must be pointed out that the VDP, insofar as the tax element is concerned, is that the underlying tax remains payable and that the concession available relates to the waiver of interest, additional tax and penalties.  In this respect, the VDP is quite different to the foreign exchange and tax amnesty, which was available in 2003, whereby amnesty applicants could regularise prior tax transgressions by paying a 2% domestic  tax levy.  The current VDP does not work along these lines.

*Dr Beric Croome is a tax executive at Edward Nathan Sonnenbergs and a member of Saica’s Integritax editorial panel

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