A recent column on the taxation of offshore investments has raised many questions.
To answer some of these questions I will be using a number of examples, in which I have assumed the investment income has not arisen from any business being carried on through a permanent establishment offshore.
If you earn a pension from employment from, say a British company, which is payable offshore on a tax exempt basis and none of the employment period was in South Africa, the pension receipt will constitute an annuity. However, although investment income for the purposes of the new legislation includes annuities, it specifically excludes pensions in consideration of past employment. Consequently, the pension annuities in this instance will not be taxable in South Africa.
If you, as a South African resident, receive rental income from residential property in a foreign country, you may not have to pay tax on that rental income.The income, under the new legislation, will be taxable in South Africa.
However, South Africa and the foreign country have a double tax agreement whereby rental income may be taxed in the country where it is earned.
Where South Africa has double tax agreements with other countries the rental income may be taxed in both countries but the tax paid in the foreign country may be credited against the tax payable in South Africa.
If you as a South African resident receive interest income from, for example, British gilts, without being taxed in Britain because of the double tax agreement, the income will fall under the new legislation and will be taxed in South Africa.
If the interest has been taxed in the other country, then depending on its true source, the tax paid there may be credited against the tax paid in South Africa.
Dividend income is tax free in South Africa, whether it is received from a South African or non South African company, so there is no tax consequence.
The next step is to establish whether there is any exemption that might result in the income not being taxable here.
One of the possibilities is that, as I mentioned above, there may be a double tax agreement in terms of which the country in which the income must be taxed has been agreed by the respective governments.
Another possibility is that you are an immigrant to South Africa, and that some or all of your offshore investments were in place before you became resident here. If this is the case, then only the income derived after February 29, 2000, from investments that were in place prior to your immigration, will be taxed in South Africa.
In this instance, even if the original investments were reinvested during your residency in South Africa, provided the reinvestment was out of funds derived from the proceeds of the original investment, this exemption will still apply.