Tax implications of offshore investments

Also familiarise yourself with the costs and the regulatory environment

THE STATE of the economy and political uncertainty are driving the flow of investments offshore.

However, investors should familiarise themselves with the costs, and the regulatory and tax implications of offshore structures, tax experts warned at the Annual Tax Indaba last week.

The international tax landscape has become more transparent because of the introduction of the Common Reporting Standard, a standard for the automatic exchange of financial information among tax authorities.

OFFSHORE TRUSTS

Andrew Wellsted, a director at RM Partners, said people who had family trusts believed the structures were under threat internationally.

Trusts have kept legislators busy for the past few years, mainly because of the suspicion that they are used to “hide” assets to avoid paying tax.

Wellsted said there were sound financial reasons for having a foreign trust. The hysteria about trusts and the rumours of their demise were exaggerated. “They have been around for a long time and have sustained several attacks,” Wellsted said, while conceding that the scope for using them might have narrowed.

Rupert Worsdale, a partner at Maitland, said it was necessary to “fight the good fight” to restore trust in trusts. “They really are the most appropriate instrument for the protection of wealth.”

He said there had been many cases of young people squandering large amounts of money they inherited because it was not protected by a trust.

Johanci Meintjes, a tax consultant at Geneva Management Group, said offshore trusts, despite recent regulatory changes that made them more administratively burdensome and expensive, would still be used as a legitimate, basic estate duty tool, and for pre-emigration structuring, legacy planning and rand hedging.

She said investors would have to give serious consideration to how the trust was funded and how distributions were made.

“We have to have a rethink of the purpose of these structures and what they are being used for.”

Worsdale said investors should ask their tax advisers for an opinion on the structures they were considering. In an article on its website, the South African Institute of Tax Professionals says that such an opinion should provide a taxpayer with reasonable grounds for taking a particular tax position, which will make it difficult for the South Africa Revenue Service (Sars) to argue that the taxpayer did not have reasonable grounds for the position he or she took. Without a tax opinion, taxpayers might be liable for understatement penalties, if the structure is attacked by Sars.

Wellsted said that in light of the nervousness about trusts, foreign pension funds and life policies were becoming more popular.

“Investors feel it might not be this year or next year, but in the near future something is going to make the use of trusts untenable and they might as well get out and move into an alternative.”

OFFSHORE ENDOWMENT POLICIES

Endowment policies are popular because they provide flexibility on the funds you can invest in. It is a life assurance contract that pays out a lump sum after a specific term (for example, after five, 10 or 20 years) or on death.

Worsdale said the tax rates on endowment policies issued by South African life assurers included 18% on capital gains and 36% on income.

He was concerned about the extent to which offshore pension funds were being sold to South Africans. “I find it abnormal. The trouble is it is used as an estate duty tool.”

Wellsted said there was nothing wrong with having foreign structures that achieved tax optimisation.

“That structure needs to be robust. You should have no problem disclosing it to the revenue authorities or anyone else because you have taken the right advice, are using it for the right reasons, you understand exactly how it works and what the outputs are. Then the exchange of information becomes a non-threat,” he said.