Parliament has approved Katz Commission recommendations that from this tax year you will have to pay tax on the income you earn anywhere in the world. This goes hand-in-hand with the easing of exchange controls on individuals.
The Katz Commission recommended that if exchange controls were relaxed, South African taxpayers should be taxed on a semi-residence basis, that is taxed on world-wide "passive" income.
To achieve this, the commission recommended that such income should be deemed to be from a South African source. These recommendations have now been adopted into legislation, but what does this concept of source mean?
South African tax law has always drawn into its net any income "the originating cause of which" was located in South Africa. For example, if a non-South African resident works here, subject to any double tax agreement stating otherwise, that person's remuneration will be taxable in South Africa.
The legislation draws in income which is deemed to be sourced in South Africa, even though it is derived elsewhere. This may arise when a South African employee works outside South Africa on a temporary basis for his South African employer. Interest derived from banking institutions is also deemed to be from a South African source unless the funds arose prior to immigration to South Africa.
The South African tax net has now been expanded, and pulls in investment income earned by South African residents which is derived from non-South African sources. Investment income means any annuity (excluding pensions for past employment and payments from a foreign social security system), interest, rental income, royalty income or any similar income. This applies regardless of whether investment income is earned directly by a South African resident, or through a foreign entity.
It does not, however, apply if the income is connected to a substantive business enterprise carried on by the resident through a permanent establishment in the other country. Nor does it apply, until 2001, to income derived from foreign investments owned prior to immigration to South Africa. It also does not apply if tax is paid on the income in the foreign country and that tax is more than 85 percent of the tax that would be paid here.
Any expenses incurred to derive the income may be deducted from it, so that only net income is taxed in South Africa. However, a loss can't be set off against other South African income. It may be carried forward and set-off against future foreign investment income.
To ensure the income is not, effectively, given away by the true owner, it will be taxed in the "donor's" hands, if it has been donated or the assets giving rise to the income have been sold on an interest-free or low-interest loan account.
To ensure that South Africans are not taxed twice on the same income, they may set off any irrecoverable foreign tax paid against South African income tax and secondary tax on companies payable.
The effect of the provisions may be that South Africans will prefer to invest in dividend-bearing investments, because these are tax-free in this country, rather than interest-, annuity- or rental-bearing investments, unless the after-tax yield from these assets is greater than the dividend yield (after any taxes in the country of origin).
Alternatively, South Africans may look to foreign endowment policies or unit trusts which have favourable yields, since the insurance companies operating them tend to have permanent establishments which exempts the income from these investments from the new provisions. For the same reason, South African companies with overseas group operating companies may choose to invest via these companies rather than directly.