With the relaxation of foreign exchange controls, more and more individuals are investing offshore and as a result of this flow of monies outside the country, the South African Revenue Services ("SARS") has now ensured that income earned from such investments is taxable in South Africa.
Interest earned from a source outside South Africa has been taxable in South Africa for a number of years. Foreign dividends that accrue on or after 23 February 2000 are now taxable in South Africa. A R4000 exemption is available and is applied first to foreign dividends and then to interest (local and foreign). The balance is taxable.
In certain countries, an individual will be taxable in that country on income earned from a source in such country. This can be achieved by means of tax withholding at source, such as in the case of the UK. In the UK, an individual can sign a non resident tax declaration to ensure that he/she is not taxable at source. It is important therefore that the individual enquire whether there is tax withholding on investment income in the foreign country where the investments are held.
If the individual is taxable in the country of source, he will therefore be taxable in both South Africa and the country of source. In terms of South African tax legislation, he will be able to claim a tax credit for the foreign taxes paid or payable. The credit may not exceed the South African tax payable on the same income. This ensures that the individual will not pay double tax, but if the tax rate is higher in the country of source, the individual will pay the highest tax on such income at the higher rate.
The individual may claim relief by means of a Double Tax Agreement ("DTA"), if one exists. Each DTA differs, however the norm is that a resident of South Africa who invests offshore will not pay more than 15% tax in the case of dividends, and 10% tax in the case of interest, in the country of source.
The so-called "roll up funds" have been popular in the past as a result of the investment not generating income (and therefore not creating taxable income) and merely increasing its capital value. However, as a result of the proposed introduction of capital gains tax with effect from 1 October 2001, 25% of any capital gain will be taxable at the individual`s marginal rate.
From an administrative point of view, it is important to enquire whether you will be able to obtain a statement of investment income for the tax year concerned. The reason being that offshore investment vehicles will not necessarily be able to provide adequate detail to match the South African tax year.
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