Tax Smart Solutions for South African Yachties | United Advisers Marine

18th Nov 2018

Tax Smart Solutions for South African Yachties

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As you may well know South African tax rules are changing from March 2020 and South African expatriates need to act if they want to avoid its dire consequences and threat to their foreign income. We run a Tax-Smart Solution offered by one of our partners that can help generate tax savings for South African yachties.

The bigger problem

While it’s a hot subject the majority of South African expatriates remain to be convinced that it will come into law and so won’t affect them, and see no need to make plans.
This belief has led to a lack of tax planning needed to mitigate any potentially heavy tax bills.
The reality is that the government has had this bill tabled for some time as a potential mechanism to resolve the need to increase its tax base.
The South African expatriate is an easy target and, in the words of Ismail Momoniat (Head of Tax and Financial Sector Policy at National Treasury);

“the key issue is you can’t live in a world without taxation. If you live in a tax haven and you have connections here in South Africa, you must pay your share.”

The likelihood is that these measures will be announced with very short notice; think budget speeches where amendments come into play at midnight or on the 1st March, leaving you no time for tax planning to mitigate the new legislation.

Does it apply if you work offshore?

Traditionally South African expatriate workers have relied upon the ‘days out of South Africa’ to negate any tax payable on their remuneration. This will no longer be the case, and no matter the period of time you spend outside of SA, tax will be payable.

What the amendment currently calls for

The amendment requires South African tax residents abroad to pay South African tax of up to 45% of their foreign employment income where it exceeds the threshold of ZAR1 million.
The new law states:

“There shall be exempt from normal tax any form of remuneration to the extent to which that remuneration does not exceed one million rands in respect of a year of assessment and is received by or accrues to any employee during any year of assessment by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument or allowance… in respect of services rendered outside the Republic by that employee for or on behalf of any employer, if that employee was outside the Republic.”

Is the legislation completed?

At the time of writing, the legislation is not completed so some details still need to be clarified. As we’ve already said though, once the new law comes into effect it is likely to come with very short notice leaving little time to react to it with appropriate planning.
There is also no doubt the government can claim they have given more than ample notice for employees and employers to get their affairs in order.

What could it mean financially? 

For a yachtie currently on a remuneration package of ZAR3 million per year there is currently no tax (as long as the ‘days out of South Africa’ criteria is met).
Under the new proposals, only the first R1 million is exempt from tax leaving some ZAR2 million as taxable income.
The marginal rate of tax will depend upon the final legislation but is currently published as 45% on all earnings, including tips, over ZAR 1,000,000
Your new tax bill could potentially be some ZAR900,000 per year.

The solutions

1. ‘Head in the sand’ 

This ‘solution’, includes ‘they won’t catch me’ and ‘how will they know’. Given that South Africa is part of Common Reporting Standards (CRS), neither of these dubious ‘solutions’ are likely to hold water, and any other alternatives can certainly not be relied upon.
CRS is an Automatic Exchange Of Information (AEOI) regarding bank accounts on a global level, between tax authorities, which the Organisation for Economic Co-operation and Development (OECD) developed in 2014. Its purpose is to combat tax evasion.
The South African Revenue Service (SARS) can, therefore, request information from foreign banks about any South African bank account holder.
In short ‘head in the sand’, apart from potentially being illegal, will likely see you default to the solution below.

2. Pay your tax in South Africa 

This solution requires no action and, put simply, will result in you getting a tax bill in South Africa. It is worth remembering at this stage that SARS do not act on the basis of ‘innocent until proven guilty’, but more ‘guilty until you prove otherwise’.

3. Financial Emigration

This could be an option for some yachties who have residency or can establish ‘tax-residency’ in another country, but this is not a simple option. It is something that can be facilitated along with secondary residency options but it can trigger financial consequences. In short, each case should be considered on its individual merits.

4. The Tax Smart Solution

Tax planning is smarter than tax evasion, not to mention that one is legal and the other is not!
By using the correct structures in tax environments like the Isle of Man it is possible to create a structure that minimises South African yachties tax liabilities.

How it works

  • It is based upon the premise that South Africa does not levy tax on foreign dividends. Therefore, if remuneration can be moved from salary to dividends we start to negate the tax liability.
  • You can receive ZAR1 million (under the current proposal) tax-free so the objective is to change the rest of your salary into a dividend.
  • This is achieved by putting in place an offshore company for which you are one of the shareholders. It is this company that is then contracted and then receives the payment from your employer.
  • On receipt of the payment, you are then paid your salary and dividend within two to three working days.

Importantly you do not need to worry about structures, administration of the company, etc. as this is all taken care of on your behalf by the trustees of the company. This is not a service offered by United Advisers Marine. The information provided above is from Tax Smart Solutions who offer this service.

What’s the cost?
There is an annual fee plus a standard 5% charge on your annual income. If you would like to know more please email me at oliver.maher@unitedadvisersgroup.com or send me a message via our Facebook page.

Author

Tom Vjestica