By Amanda Visser

South Africans are increasingly making use of their discretionary and foreign investment allowances to move funds offshore. The South African Reserve Bank controls the in- and outflow of capital through exchange control regulations. Over the years, these regulations have been relaxed considerably and South Africans can now move R11 million per year out of the country.

For exchange control purposes, there are two allowances available to South Africans who are older than 18 years, live in South Africa or who are temporarily living abroad: They can either use the discretionary allowance of R1 million or the foreign investment allowance of R10 million.

Hugo van Zyl, an independent tax specialist and a member of the South African Institute of Chartered Accountants’ Exchange Control Committee, says that when people want to transfer more than the allowed R11 million (for example to buy foreign property), they will need permission from the Reserve Bank and a tax clearance certificate (TCC) from the South African Revenue Service (SARS). However, the property or investment must be concluded in the person’s name and may not be used to set up a trust that will hold the property.

Important considerations

To transfer the discretionary R1 million allowance, you only require a green identity document or a smart identity card.

To transfer the R10 million foreign investment allowance, you will require a TCC personal identification number (PIN) from SARS to verify your tax compliance status.

Van Zyl also notes that foreign investments that have been regulated can remain offshore. However, if the investor bequeaths the investments to any children who have South African resident status in terms of exchange control regulations, the children will either have to return the money upon the investor’s death or obtain permission from the Reserve Bank to keep it abroad. If someone inherits money from a foreigner or South Africans who emigrated, the money can remain abroad.

South Africans who bequeath their offshore investments to children who live in South Africa should rather consider a donatio mortis causa. This implies that, when the person dies, the offshore investments are deemed to have been donated and will form part of the estate in South Africa.

It is advisable to obtain legal advice if the movement of the R1 million allowance has been substantial over the years.

Important differences

According to Van Zyl, people are allowed to lend the R1 million allowance to family or South African friends who live abroad to either study, travel, as foreign investment or alimony payments. In contrast, the R10 million investment allowance may not be lent. This allowance is solely for investment purposes but may be advanced to a foreign entity or trust.

There are no restrictions in terms of the types of investments that can be made; however, it is not allowed to reinvest back into South Africa through another entity (so-called loop structures).

Tax considerations

Individual taxpayers should ensure that, when they lend money (through the R1 million discretionary allowance) to someone who live abroad, their paperwork reflects that it is a loan and not a hidden donation.

If it is considered to be a donation, the taxpayer may be liable for donations tax – which is currently levied at 20% or 25% of the amount donated. Amounts in excess of R100 000 per annum will attract donations tax.

“There has to some form of loan agreement in place – and that means that if you die, the person who received the loan would have to repay it,” Van Zyl says.

Taxpayers who lend money to an offshore trust must be mindful of existing transfer pricing anti-avoidance tax rules. They will be liable for tax in South Africa on the deemed interest income on the loan if no interest is charged, or when the interest is below arm’s length rate.

Transfer pricing is very relevant to individuals – and not only companies – who are involved in cross-border transactions.

International lotteries

South Africans are not allowed to use their South African credit cards, their discretionary or foreign investment allowances to participate in an international lottery.

Foreign investments

Van Zyl says that, given the country’s dire need for foreign direct investments, government should consider following the example of other jurisdictions who are attracting investments by allowing foreigners to obtain residency by way of investor visas. “Many people will pay for the sunshine and good weather that South Africa has to offer,” he says.