Abstract

Given South Africa’s present political and economic position, a significant number of wealthy taxpayers are either engaged in making contributions to foreign pension schemes or are contemplating doing so. As the heading to this article suggests, the South African tax implications that arise when a South African resident taxpayer embarks on this journey are complex and confusing. Whilst SARS has provided some guidance in terms of a binding class ruling, this guidance is limited to the position where the South African participants participate in the foreign pension scheme as vested beneficiaries — not the general position. The ruling nevertheless provides some indication of SARS’ views as regards the application of the law in these circumstances. However, SARS neatly side-stepped the real issue, namely that a strict application of the law results in double taxation in certain instances by declining to rule on the application of section 25B of, and paragraph 80 of the Eighth Schedule to, the Income Tax Act, 1962. This article explores the South African tax implications that are triggered for South African residents in consequence of their participation as vested beneficiaries in these foreign pension schemes — the situation addressed in SARS’ binding class ruling. The South African implications that arise are wholly dependent on the rights and obligations that are established under the foreign pension scheme rules. However, as a general proposition it may be said that under a vested scenario the South African participants are required to make regular contributions to the foreign pension scheme, although lump sum contributions are allowed in certain instances. The contributions are then accounted for in a bespoke account, as is any accretion in value. When the time comes for payment of the retirement benefits (the income capital will already have vested in the beneficiaries), the trustees generally have a discretion as to the nature and value of the payments — but the participant has a right to request the trustees to exercise their discretion in a specific manner. The article concludes in the first instance that the contributions made by the South African participants to the foreign pension scheme do not constitute a donation that is subject to donations tax. As regards accretions in value in the bespoke account (e g interest, dividends, realised capital gains, the article argues that those amounts fall to be taxed in the hands of the resident Once the trustees exercise their discretion to pay the South African participants either an annuity or a lump sum, South African income tax or capital gains tax is triggered again. A possible double taxation conundrum accordingly arises should any income or capital derived by the foreign pension scheme have previously been vested in the South African beneficiary. On death, it is strongly arguable that the amount standing to the credit of the resident beneficiary in his or her bespoke account does not form part of the deceased South African beneficiary’s estate for estate duty purposes, or an asset for capital gains tax purposes.

Abstract

The legislative rules relating to ‘dividend-stripping’ are complex and everevolving. This article seeks to examine the more complex aspects of those rules, particularly as they relate to the anti-avoidance elements of the legislation. The simplest way to explain the application of these rules is to illustrate their application with concrete examples. Prior to the application of the dividend-stripping rules it was relatively easy to escape tax on share exits, whereby a purchaser subscribed for shares in a target company and the target company repurchased the sellers’ shares free of tax by way of a ‘return of capital’ and/or a dividend distribution. The article deals with the rules as they apply in relation to (a) deferral transactions; and (b) ‘clawback’ transactions. The former transactions are excluded from the dividend-stripping rules and the latter are brought into the dividendstripping rules. Deferral transactions escape the application of the dividend-stripping rules. These transactions include transactions covered by the roll-over relief provisions contained in sections 41 to 47 of the Income Tax Act, 1962 (‘the Act’). ‘Extraordinary dividends’ are recharacterized in the Act for tax purposes. These are dividends that arise within 18 months of a sale of shares transaction, or arise in respect of a sale of shares and exceed 15% of the value of shares at the date of sale or 18 months prior thereto, whichever is the higher. A distribution of shares by a company in anticipation of the liquidation of the company (section 47 of the Act) will escape the dividend stripping rules. The recipient company of distributions from the liquidating company will also escape the dividend-stripping rules, as distributions derived by section 47 (liquidation distributions) and section 46 (unbundling transactions) are excluded from ‘extraordinary dividends’. So too does section 47 of the Act exempt from tax the disposal by a company of shares in the liquidating company.

The ‘clawback’ rules work as follows:

• Dividends derived by a company that disposes of shares to another company in terms of the rollover relief rules, other than a section 46 unbundling, will form part of the proceeds for capital gains tax (‘CGT’) purposes in the hands of the company disposing of these shares to third parties.
• A similar provision will apply to dividends declared by one company to another company (‘old shares’) where the shares in the declaring company are sold under section 42 of the Act (asset-for-share transactions) to a new company which issues shares to the disposing company (‘new shares’) and the disposing company sells such new shares to a third person. The dividends declared on the old shares will form part of the proceeds for CGT purposes in the hands of the company disposing of these shares to third parties.