FOREIGN PENSION TRUST – SARS ADVANCE TAX RULING

Editors Note:
In this sixth newsletter for 2022 we consider the following:
Foreign Pension Trust – SARS Advance Tax Ruling (ATR)
Two-Pot Retirement System & Tax
The Model v SARS – 211/2021 (judgment 20 June 2022), ZASCA
Post Facto Public Domain Information and Voluntary Disclosure Program (VDP)
SARS Interpretation Notes (INs), Draft INs, Guides, BCRs, BPRs Noter-Up

Tony Davey – Editor
Duncan McAllister – Co-Editor

An Advance Tax Ruling (Binding Class Ruling (BCR)) 080 dated 12 August 2022, pertaining to a specific foreign pension trust (FPT) structure has been published by SARS.

The Ruling determines the income tax, capital gains tax and estate duty implications for resident beneficiaries of this proposed FPT investment. Clearly, a tax-savvy prospective investor applied for this Ruling and although the class members to whom the ruling applies is specific as between SARS, the applicant and resident investors who will become beneficiaries of this prospective foreign pension trust (FPT), the fact that this Ruling is published for general information is a very strong indicator of SARS’s view on this particular FPT structure. (There are various other FPTs which are structured in a different manner with possibly different tax consequences).

I addressed FPTs’ in general terms in August 2016 in the late tax doyen, Costa Divaris’s Tax Shock Horror newsletter to which I was a monthly contributing author. My recommendation in favour of an advance tax ruling from SARS (in the interests of certainty) was dismissed by the offshore suppliers and local Financial Service Provider (FSP) promoters, who claimed that an investment in these various offshore retirement funds incurred no donations tax, deferred income tax and CGT (if any) or estate duty.

The Davis Tax Committee also expressed misgivings, stating:
‘This arrangement, in the view of the Committee, represents a concealment of the true arrangement between the SA taxpayer and the offshore trust/retirement fund. The true arrangement is that the taxpayer has a vested interest in both the capital and income of the offshore trust/retirement fund. As such, the income of the arrangement is taxable in the hands of the SA resident taxpayer and the capital should be included in the estate duty computation.’
Simply put, SARS BCR is to the effect that this specific FPT has no favourable tax attributes as purported. In future articles to be published in the Davey’s Locker newsletter, I shall consider various aspects of this BCR in detail vis-à-vis the deemed annual attribution for tax purposes of the income to the investor, CGT and estate duty. In due course I shall also consider the tax implications of other FPT variant structures.

TWO-POT RETIREMENT SYSTEM & TAX

The Revenue Laws Amendment Bill draft legislation for public comment proposes a so-termed ‘two-pot retirement system’, effective 1 March 2023.
In essence, contributions to any retirement fund (Pension, Provident, Preservers and Retirement Annuities) must effective 1 March 2023 be allocated on the basis of two- thirds to a ‘Retirement Pot’ and one-third to a ‘Savings Pot’ as defined in the section 1 definitions in the Income Tax Act.

There is also a third pot termed the ‘Vested Pot’, which is the value of a member’s retirement benefit (being contributions and investment growth as at 1 March 2023) which is ring-fenced and will continue to operate under the current status quo rules and cannot be accessed. This limitation on accumulated funds is already subject to criticism.

The raison détre of the new system is to allow retirement fund members access to the savings pot element without the requirement to terminate employment. Such access is allowed once in a twelve-month period with a minimum withdrawal of R2 000.

TAX IMPLICATIONS

Contributions
The current status quo remains in that the section 11F tax-deductible contributions are limited to 27,5% of taxable income with a maximum of R350 000 per tax year. Any excess contributions (which can be carried forward for deduction in a subsequent tax year) can be allocated only to the ‘retirement’ pot.

Savings Pot Access
Any receipts from this pot, termed a ‘savings pot withdrawal benefit’ are included in the member’s ‘gross income’ under a new paragraph (eC) of the said definition in section 1 of the Income Tax Act. Such amounts will thus be fully taxed at the member’s marginal tax rate, with no concessions. Thus, compared to termination of service withdrawals and retirement scenarios, the tax is penal.

Withdrawal Tax Table Upon Termination of Employment Service
The status quo remains as is, being as follows:
R25,000 tax free,18% up to R660,000, 27% up to R990,000 and the balance thereafter 36%.

Retirement (including death)
The status quo remains as is, being as follows:
R500,000 tax free,18% up to R700,000, 27% up to R1,050,000 and the balance thereafter 36%.

Transfer between Retirement Funds
Transfers between retirement funds remain tax free. Certain caveats are that transfers from a ‘retirement’ pot can be made only into another recipient ‘retirement’ pot. Thus, a ‘retirement’ pot cannot be transferred to a ‘savings’ pot. A “savings” pot can be transferred to a ‘retirement’ pot but not vice versa.

THE MODEL V SARS – 211/2021 (JUDGMENT 30 JUNE 2022) ZASCA

This appeal to the SCA by SARS, the matter having traversed through both the Tax Court and High Court, was focused on the procedural aspects of firstly, whether a Section 95(3) of TAA settlement assessment agreed to by the taxpayer and SARS can be subsequently objected to by the taxpayer, and, secondly, whether a Rule 56 application for a default judgment (in this case against SARS for non-compliance with the Rules in not delivering Grounds of Assessment under Rule 31) is permissible if it was not preceded by a valid Objection and notice of Appeal. The SCA held that the application in the tax court was premature, because SARS was not in default as envisaged in rule 56(1) as such process was not preceded by a valid Objection and valid notice of Appeal. Simply put, SARS was not obligated to deliver to the taxpayer, Grounds of Assessment opposing the Appeal because the Appeal was procedurally flawed.

In summary, a taxpayer cannot just ‘jump the queue’ for relief but must follow all the sequential procedural steps.

POST-FACTO PUBLIC DOMAIN INFORMATION AND VOLUNTARY DISCLOSURE PROGRAMME (VDP)

227 of the TAA states that core requirements for a VDP are, inter alia, that it is voluntary and it must be made before the taxpayer (or agent) has been given notice by SARS of an audit or investigation. Thus, as a general statement, if a taxpayer applies timeously, prior to notification by SARS, VDP is available for undeclared income.

SARS draft Guide to the VDP 20 October 2021 considers the meaning of “voluntary”. The word ‘voluntary’ is not defined in the TAA. The Cambridge Dictionary defines ‘voluntary’ as ‘done, made, or given willingly, without being forced or paid to do it’.

In Purveyors South Africa Mine Services (Pty) Ltd v C: SARS [2021] JOL 52128 (SCA) the court considered whether the application made by the taxpayer was ‘voluntary’ for purposes of section 227(a) of the TAA. In 2015, the taxpayer had imported an aircraft into South Africa, which it used to transport goods and personnel to other countries in Africa. The taxpayer was liable for the payment of import VAT to SARS on the importation of the aircraft which it failed to pay. During the latter part of 2016, the taxpayer had reservations about its failure to pay the import VAT and engaged with representatives of SARS to obtain a view on its liability for such tax. Following these engagements, the taxpayer was advised by SARS on 1 February 2017 that the aircraft should have been declared in South Africa and import VAT paid to SARS. The taxpayer was also warned that penalties were applicable because of the failure to pay the import VAT. Approximately a year later, the taxpayer applied for voluntary disclosure relief, which SARS declined on the basis that the requirements of section 227 had not been met.

The court agreed with SARS’s argument that the taxpayer’s application was not ‘voluntary’ based on the following reasons:
‘The term is not defined but its ordinary meaning is “an act in accordance with the exercise of free will”. If there is an element of compulsion underpinning a particular act, it is no longer done voluntarily. In the context of part B of Chapter 16 of the TAA a disclosure is not made voluntarily where an application has been made after the taxpayer had been warned (by SARS) – my insertion) that it would be liable for penalties and interest owing from its mentioned default. It was submitted that the application was brought in fear of being penalized and with a view to avert the consequence referred to.’

The crisp further issue, however, arises as to whether a taxpayer can succeed with a VDP application if the default is information in the public domain, for example, publication in the press, on the rationale that it is no longer a voluntary action.

Our sense is that the element of ‘free will’ as discussed above, is absent (on the contrary, the element of compulsion is present as the tax default is public knowledge and thus can be reasonably inferred to be known to SARS) and hence the requirement that the application for VDP be ‘voluntary’, is not satisfied.