I have come across some strange situations in recent weeks, which relate to the structures being proposed to people who are looking to invest money offshore.
If you have not already invested the R500 000 to which you are entitled, you may apply to the bank to invest funds outside South Africa. If you are able to provide the bank with a tax clearance certificate, it will transfer the funds for you.
The question which some people are battling with is where do you put your money?
If you invest directly in rental, royalty, certain annuity or interest-bearing assets, the income which you receive from the investment will be taxable in South Africa (unless there is a double tax agreement to the contrary).
Consequently, you may look at investing in such assets through a trust or a company.
If you invest in the share capital of a company which, in turn, invests in such assets, the income derived by the company may be taxable in your hands. Similarly, if you place the funds in a vesting trust, in which South African residents have a vested right to more than 50 percent of the participation rights. Thus, a discretionary trust might look like a better option.
The income from a discretionary trust will only be taxed in one of the South African beneficiaries' hands when it is paid to that beneficiary. And, provided the trust deed is drafted correctly, the growth in the value of the assets should not fall into the hands of the South African person who provided the funds, for estate duty purposes.
What is of concern, though, is that a number of people are not aware of the consequences that may arise in making the funds available to the trust.
If you donate the money to the trust, you may be liable for donations' tax of 25 percent. In addition, if the income is not distributed to the beneficiaries of the trust you will be taxed on so much of the income which represents interest, rentals, royalties and certain annuities which arose as a consequence of your donation.
If you lend the money to the trust and charge interest, the interest will be taxable in your hands. If you lend the money interest-free, and the trust may be considered to be "connected" to you by virtue of the identity of the beneficiaries, the transfer pricing rules may be applied by the SA Revenue Service (SARS).
These rules allow SARS to include in your taxable income an amount that represents what you would have been taxed if you charged a reasonable amount of interest, notwithstanding the fact that you have not received or accrued any interest at all.
Again the interest-free loan is considered to be a form of donation, and any taxable income received by the trust which is not distributed by it may also be taxed in your hands.
It may seem that, no matter how you take the funds offshore, you are going to be taxed in some way, and that the only option is to invest directly in shares bearing dividends, since dividend income will be tax free in your hands.
This is not actually the case. There are ways of investing in other assets offshore, through a separate entity offshore without incurring a tax liability in this country. However, this can be quite costly. So, based on what you can currently invest offshore, you may consider such structures to be too expensive.
The main thing is to be aware of the potential pitfalls, and to make sure you go into an offshore investment with your eyes wide open as to the South African tax consequences.