PODCAST | Offshore trusts and pension funds may be all the rage, but they do have tax consequences

Many South Africans are increasingly looking to move money into offshore pension funds and into offshore trusts. In this edition of Business Law Focus, host Evan Pickworth speaks to international tax expert Dr Albertus Marais, founder of AJM, on the risks and severe penalties of not reporting payments to offshore trusts, and how Sars sees the offshore pension contribution as taxable.

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It has become common practice for wealthier individuals to invest funds via an offshore trust. Many South Africans use their annual exchange control allowances to invest outside SA’s borders. Individuals have R1m that they can apply as a single discretionary allowance annually to spend offshore in whatever way they wish (including making investments).

South Africans can also invest up to R10m annually in offshore assets, using their foreign investment allowance. These investments may be made on the condition that a Sars tax clearance certificate can be shown to the relevant bank through which payment of funds to an offshore account is made. Many South Africans do not realise that payments to offshore trusts, including loans advanced, amount to a “reportable arrangement” in many instances. 

“Reportable arrangements” must be reported to Sars within 45 days, failing which severe penalties may be levied. Penalties range from R50,000 to R300,000 per month, charged for up to 12 months as long as nonreporting remains.

Sars also recently issued a binding class ruling (BCR 080) on August 12 wherein it sets out its position on contributions made by South Africans to offshore pension funds. Sars makes it clear that contributions to these pension funds will not have the effect of achieving an estate duty saving.