NEWS & OPINION
28 February 2021
DR ALBERTUS MARAIS Director, AJM Tax
I
n a much-anticipated move, the South African Reserve Bank’s Financial Surveillance Department published its first circular on 6 January 2021, whereby it ended the long-standing exchange control prohibition against so-called ‘loop’ structures. Previously, such ‘loop’ structures would involve South Africa exchange control residents holding interests in SA assets via an offshore structure, be it through an offshore company or trust. Previously, these regimes were the subject of strict regulation and ‘loop’ structures would only be allowed in very limited instances, such as where SA residents held 40% or less of the shares in a foreign company that held interests back into SA. The prohibition existed to address tax avoidance being perpetrated through using such structures,
Exchange control prohibition lifted
predominantly SA capital gains and dividend taxes. For example, if an SA individual would hold shares in an SA company through a Mauritian entity, the Mauritian entity would have been able to receive dividends and realise gains on sale of the SA shares at a much-reduced tax cost, had the SA individual held those shares directly.
IT IS GOOD TO SEE THAT INVESTMENT INTO SA WILL BE ENCOURAGED AS A RESULT OF THE AMENDMENT In terms of a policy reconsideration, communicated by the Minister of Finance during
the Budget of last year, government took a decision to no longer combat tax avoidance through use of exchange controls, but took the encouraging decision rather for tax avoidance to be addressed through tax avoidance legislation. In accordance with new government policy, exchange controls should be employed primarily to protect the rand; tax legislation should be developed to tax ‘loop’ structures more effectively. In advancing this policy narrative, government has introduced tax legislation over the past few years to more effectively tax both direct SA shareholdings in offshore companies, as well as distributions of trust capital from offshore trusts in low-tax jurisdictions. While some uncertainty existed until recently whether government was going to proceed with this
significant relaxation of exchange controls, the circular now issued confirms that that policy decision has been implemented. The relaxation applies only to ‘loop’ structures created from 1 January 2021; it does not cater for unauthorised ‘loop structures’ that existed prior to that. It also only applies to persons who are both SA tax and exchange control residents. It is good to see that investment into SA will be encouraged as a result of the amendment, as previously it was often the case that legitimate, non-tax-related reasons existed why investments from offshore were sought to be made in this country, yet hamstrung due to that investor having some distinct indirect SA interests held in them. The policy decision of the Reserve Bank, therefore, even though somewhat overdue, is to be applauded.
The questions you should ask your clients when it comes to protecting their estates
W
hether your clients inherit cash, investments or property, as their financial planner it is your responsibility to advise them of the best way to protect their estates, especially from the taxman. David Thomson, Senior Legal Adviser from Sanlam Trust, explains that as a financial planner you are responsible for asking the right questions, putting the best options forward to your clients, and ensuring you are aware of any tax and regulatory changes that could affect them. The COVID-19 pandemic and lockdown has resulted in thousands of job losses due to retrenchments, as well as the collapse of many businesses – so clients need good advice now more than ever. More than 70% of working South Africans also do not have a will, which compounds the confusion and uncertainty AS A FINANCIAL brought about by lockdown, PLANNER, YOU he adds. ALSO MUST BE “For many AWARE OF ANY TAX people, their life expectancy AND REGULATORY has been cut CHANGES THAT tragically COULD AFFECT YOUR short due to COVID-19. CLIENT’S ESTATE Putting off executing a will and engaging in estate planning is short-sighted. Every day we hear of people who have passed away due to COVID-19, which significantly aggravates the situation for those who are already vulnerable, in poor health, obese or with so-called comorbidities. The time to act is now,” says Thomson. Below, Thomson shares the top 10 questions financial planners should be asking their clients to
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establish how to structure their estate in the most effective manner: 1. Are they married and, if so, is it in community of property or not? Or, if they are recently divorced, have they changed their will and beneficiary nominations on all policies to reflect their current needs and wants? 2. Do they have children and other dependants who rely on them for financial support and have they considered guardians for their minor children, if they have any? 3. Ask your client for a copy of their last will and testament. If no will exists, do nothing before you have prepared a will for them. Failure to have a will means failure to plan from day one. 4. Have they considered a trust for special needs or disabled beneficiaries? 5. Have they considered whether they have enough liquidity at date of death to ensure the proper finalisation of their will? 6. What is their taxable income and income tax rate? 7. What are their total assets and debt (both long-term and short-term debt)? You must also obtain their insurance portfolio and beneficiary nominations. 8. Are they a member of a retirement fund? Acquire the details of the type of fund and the benefits in monetary terms. Ensure that your client’s nomination forms are up to date as their circumstances might have changed. It is also vital to understand when they intend to retire and what they will need as far as income is concerned at that time. 9. Are they planning to emigrate? 10. Engage your client on their lifestyle and attitude towards tax. You may be surprised to find that many people do not want to structure their lives
around tax and prefer to maximise what appeals to them, regarding tax as a necessary evil. For example, some people regard having a family trust as an administrative burden and offshore trusts as very expensive. Retirement funds, which include pension, provident and preservation funds, all provide taxexempt ‘roll-up’, which means taxpayers enjoy taxexempt growth in their portfolio and have the right to deduct certain contributions for tax purposes. Endowment plans also provide tax-exempt proceeds on the maturity of the investment. Thomson advises that the best way to protect your clients from the taxman is to ensure they file their tax return on time, thereby avoiding penalties and interest. As a financial planner, you also must be aware of any tax and regulatory changes that could affect your client’s estate. Thomson advises that, considering the fiscal shortfall the government of South Africa finds itself in, there may possibly be an increase this year in the rates of estate duty, donations tax and capital gains tax, as recommended by the Davis Tax Commission. “We anxiously await the Minister’s budget speech,” he adds. “Effective tax decisions must give rise to effective estate planning – which means your client’s estate actually passes to the people they want to benefit, and not into a structure that their heirs find costly and burdensome.” David Thomson, Senior Legal Adviser, Sanlam Trust
