01 Jul Accidental Tax Evasion: How To Keep Things Above Board

Accidental tax evasion: how to keep things above board

If there’s one thing which sends fear into the hearts of all South Africans (and let’s be honest, people around the globe), it’s taxes.

Few people have a proper understanding of taxes and even those who appoint qualified parties to manage it for them often fall foul of the law. While deliberate tax evasion is, of course, a very real occurrence, many people simply don’t know their rights or obligations.

Many South Africans are wondering if their affairs are in order. If the man in charge of the country can be accused of tax evasion – dubbed the ‘forex saga’ by the Daily Maverick and DollarGate by the DA – then how much more likely is it that ordinary citizens can be guilty of infringement?

Let’s break it down.

Ramaphosa’s forex debacle

It’s quite confusing to some that the matter of stolen money from the president’s Phala Phala farm could be dubbed a forex saga. After all, in modern times most of us associate forex with online transfers.

The fact remains that the money said to have been stolen from the farm is purportedly foreign currency (US dollars, as reported), and this money has disappeared into the South African market. It has even possibly crossed the Namibian border, though the details around the case are still rather sketchy.

What is money laundering?

The Financial Services Conduct Authority (FSCA) describes money laundering as a process used by criminals to conceal the nature, source, location, disposition or proceeds of unlawful activities. Criminals who gain an income through illicit activities need to somehow find a way to use the money they have gained or convert the assets they have stolen into another type of asset. This means that they try to introduce these proceeds into legitimate financial systems as soon as possible.

In the Ramaphosa case, the accuser stated that the criminals went on a spending spree in Cape Town. While laymen might not understand the rationale behind such spending spree and think it rather silly to waste all this money so quickly, there’s a sound rationale behind it.

Criminals generally exchange their loot for different types of assets (in this case they simply used the actual money). These assets are then generally resold to convert it back into money – the cash can then be used for legitimate purposes or deposited into different accounts over time. In the case of criminal networks, the money is often used to fund terrorism or other criminal activities either on a local or international scale

But there’s one step we skipped over in this matter – the exchange of foreign currency for rands.

Why can foreign currency only be exchanged through an authorised dealer?

Currency may only be exchanged via an authorised forex dealer which is regulated by local and international financial oversight bodies. This prohibits money acquired by illicit means to cross international borders.

There are two types of forex ‘agencies’ – those that take in the actual physical currency (forex exchange branches or banks) and forex dealers who trade in different currencies. While forex dealers make a profit, this profit is restricted and must operate within a certain scope based on the values of the trading pairs. A trading pair is the two currencies which are exchanged – essentially you’re looking at how much of one currency it costs to buy another. This will always be represented in a ration of 1:x or y:1, so one currency will always be represented by a ‘1’ to indicate how much of the other currency is required to buy 1 unit of the other. For instance, 1 ZAR costs 0,063 USD, or 1 USD costs 15,88 ZAR.

The ‘restriction’ on how much a forex dealer can make is based on the type of exchange rate used. Most governments indirectly regulate exchange rates by changing lending rates. In the USA this is done through the Federal Reserve (Fed) and in South Africa this is done through the prime lending rate. This is not always the case, however, as governments can also choose to directly control their exchange rate, such as China.

What’s the deal with forex and taxes?

The Income Tax Act of 1962 specifies that foreign currency must be translated into rand by using an applicable average exchange rate. This rate is defined in section 1(1) of the Act and specific to a certain tax year (year of assessment). Essentially the average exchange rate is determined using closing spot rates at the end of daily or monthly intervals in a year of assessment and the rate must be applied consistently during such year.

The SARB determines weighted average exchange rates via forex transactions of commercial banks, and SARS publishes such rates on a quarterly basis.

Taxpayers aren’t forced to use these rates, but if they don’t use these rates they need to keep a record of how alternate exchange rates were calculated should SARS wish to audit their accounts.

Where SARS comes into the picture in the Ramaphosa debacle is the fact that large amounts of foreign currency, acquired by criminals, had been allowed to disappear into the ether without the matter being brought to the attention of authorities. The Revenue service would firstly be interested in the actual transaction (the sale of cattle) which allowed for such a sizeable amount of US dollars to change hands – and they would want to know whether this income was reported (irrespective of whether or not it was subsequently stolen) and why it would be necessary to deal in cash when an electronic transaction would undoubtedly have been a far more secure mode of transacting and safeguarding the funds.

Secondly – by not reporting undisclosed US currency entering the South African market, this could implicate the president himself in actual money laundering activities.

The latter may have merit, but not in so far as the president actually being part of the gang which stole the funds in the first place.  The accusations also point out that the president (or others appointed by him) had tracked and interrogated the supposed criminals, and actively tried to recover the money – which indicates that the theft was certainly not a deliberate act on his part. It’s the non-disclosure of the money which raises brows, especially since reports note that this money was hidden within furniture at the Phala Phala farm and that the criminals were bribed to keep quiet about the theft. It is truly an odd place to stow funds – especially since a place like Phala Phala would undoubtedly have actual safes where materials could be locked away (if anything, one could undoubtedly afford another safe with such pocket money).

How average South Africans err

Most South Africans don’t deliberately seek to obscure their financial dealings from tax authorities. In fact, accountants and tax practitioners are deliberately appointed by companies to seek out ways in which companies and individuals can legally pay the least taxes and earn the greatest tax cuts.

It’s generally those who can’t afford accountants or tax specialists who err. While platforms like e-filing and TaxTim certainly make it easier to file taxes nowadays, it’s still incredibly difficult for ordinary people to understand what all the different terminology means, what they are supposed to provide to SARS, what they are supposed to claim, how they should record their income and expenses and so forth.

One frequently hears complaints by individuals who assumed they would be getting something back from the tax man, only to be told that they owe money instead. As a result, many people simply refrain from completing their returns – and the longer they fail to file returns, the more difficult it becomes to actually do things by the book.

The good news

While there is a chance that you may owe SARS money if you haven’t filed returns in a while, this is not always the case.

Firstly, the voluntary disclosure programme (VDP) introduced by SARS a few years ago is specifically aimed at assisting South Africans in getting their taxes up to date. In SARS’s own words:

“The VDP aims to encourage taxpayers to come forward on a voluntary basis to regularise their tax affairs with SARS and avoid the imposition of understatement penalties and other administrative penalties.”

The VDP acts like a proverbial ‘cleaning of the slate’ in a sense. While you could still receive penalties for significantly undisclosed amounts or deliberate acts of tax evasion, in many cases individuals are given a slap on the wrist (provided their oversight wasn’t aimed at deliberate evasion). The VDP is primarily aimed at disclosing cross-border transactions and offshore income, but one can also apply under other circumstances. There’s a pretty good chance that many people don’t even qualify for this programme as their perceived tax infringements may not be infringements at all.

Tax ignorance

The reason many people refrain from filing taxes is simply that they have a warped understanding of how much tax they would need to pay. The SARS website is also not easy to navigate or often sends one down a rabbit hole where you endlessly click through links.

Luckily most individuals within formal employment don’t need to do much in terms of their tax filing as their employers, insurers, banks and medical aids automatically send through all documentation to SARS. Oftentimes it’s as easy as simply checking that the ITR12 form which has been auto-generated by SARS is correct and clicking on submit.

Those who struggle most are individuals who are self-employed, sole-proprietors or part of micro businesses. Some people often make the mistake of registering businesses when they kick off, only to find that these businesses don’t generate an income and then running for cover when the tax man asks why returns weren’t filed.

Others are eager to file taxes and mistakenly believe that they can claim back money for virtually any and all expenses.

Who needs to pay taxes?

For individuals, income tax is determined by the following criteria:

– earning more than R87 300 per year if you are under 65 years of age
– earning more than R135 150 per year if you are between the ages of 65 and 75
– earning more than R151 100 per year if you are over the age of 75

The following tax rates apply for personal income tax:

Turnover tax

A great solution offered to micro businesses and sole proprietors comes in the form of turnover tax. Since the tax man is aware that individuals struggle to file taxes and generally don’t know how to record income and expenses accurately, they’ve made it pretty easy. Additionally, since most micro businesses incur many small expenses during their operations, SARS applies a far lower tax rate to eliminate the need for record keeping and account for such expenses.

Turnover tax replaces income tax, VAT, provisional tax, Capital Gains tax and Dividends tax for micro businesses with an annual turnover of R1 million or less. Turnover tax applies a tax rate to the taxable turnover of a micro business over a year of assessment (1 March to 28/29 February).

Turnover tax applies to individuals, partnerships, close corporations, companies or co-operatives with an annual turnover of R1-million or less.

To register, one must apply for an appointment at a SARS branch via their eBooking system or email.

Turnover tax payment dates

Unlike conventional income tax, turnover tax has three payment dates.

– The last business day of August on the TT02 – Payment Advice for Turnover Tax
– The last business day of February on the TT02 – Payment Advice for Turnover Tax
– A final payment after submission of the TT03 – Turnover Tax Return (between July and January of the following year)

Turnover tax records

Turnover tax requires far less paperwork than conventional tax filing. The following records are required.

– Records of all amounts received
– Records of dividends declared
– A list of each asset with a cost price of more than R10 000 at the end of the year of assessment as well as of liabilities exceeding R10 000

SARS even provides a template recordkeeping workbook which one can download from their site in order to assist with turnover tax filing.

What about money crossing borders?

South African taxpayers receive an exemption on foreign income provided it satisfies certain criteria and are also allowed certain allowances on foreign expenditure.

Offshore transfer allowances

South Africans are allowed to transfer up to R1 million per annum offshore under their single discretionary allowance and this could be used for any legal purposes – whether for investment, entertainment, travel (capped at R200 000 per annum), gifts, education or anything else.

SARS does, however, require proof of travel should the allowance be used for travel purposes, and transfers for travel purposes may not be into another individual’s account. To transfer such money offshore, all you need is your ID and to transfer the funds via an authorised dealer.

In addition to this, South African taxpayers are allowed to invest up to R10 million offshore provided they have a tax clearance certificate.

These rules don’t apply to the Common Monetary Area (South Africa, eSwatini, Lesotho and Namibia).

Krugerrands

Krugerrands are a bit more tricky. South Africans are allowed to export Krugerrand coins up to R30 000 per annum as gifts for non-residents and non-resident visitors may export 15. All foreigners exporting these are required to prove that they were purchased with the proceeds of foreign currency brought into South Africa.

Krugerrands aren’t covered in specific tax legislation but the proceeds of Krugerrands are still taxable – this may fall under capital gains tax or be deemed fully taxable profit revenue, depending on the type of purchase and intent of sale.

What is the R1,25 million exemption?

South African tax residents receive an exemption on foreign sourced income under R1,25 million per year (applicable from 1 March 2020). Any remuneration received in excess of R1,25 million will be subject to taxation of 45%. While this seems excessive, this is quite near the general income tax thresholds.

To qualify for the exemption, the following applies:

– you must be a tax resident of South Africa
– the remuneration must fall within certain criteria
– it must have been earned during certain periods
– it should not be subject to exclusions

The exemption applies to:

– salaries
– taxable benefits
– leave pay
– wages
– overtime pay
– bonuses
– gratuity
– commission
– fees
– emoluments
– allowances
– amounts derived from broad-based employee share plans
– amounts received in respect of share vesting.

The problem with the R1,25 million threshold is that any and all income is included in the determination of the income (even travel allowances, club memberships and other perks).

South African tax residents living and working abroad can apply for tax relief under a double taxation agreement (DTA), but such relief needs to be applied for annually and still requires normal filing of one’s taxes. A DTA is an agreement between different tax regulators which prevents different governments from charging taxes for the same income. Historically, DTA’s were a great benefit for certain individuals since the tax rates of certain countries are far lower than South Africa’s.

SARS is no longer as lenient, and they are determined to recover the full taxable amounts due – which means that shortfalls or lax tax treatment by foreign countries will be scrutinised and may be recovered from your local tax bill.

The new expat tax

In order to sidestep SA taxes and access funds which may not be withdrawn locally (retirement funds), many South Africans living abroad turned to financial emigration (FE) in the past. FE allowed the individual to forfeit their South African tax residency and claim tax residency abroad. This also allowed them to encash the proceeds of retirement annuities and transfer these funds abroad – something which is prohibited under retirement age (55) in SA.

The government has done away with the need to apply for financial emigration (from 1 March 2021) and ‘eased’ the process of securing foreign tax residency and transferring money offshore…but there is a catch.

If you’re living abroad or planning on emigrating, the South African government wants to ‘test’ your intent and loyalty over a period of three years. If your RA fund value is more than R15 000, the annuity will need to stay put for three consecutive years from the date of your emigration, and during this time you will need to demonstrate that you’re not in any way planning on returning to SA or interested in local economic activities (to a certain degree). The new regulations are a type of reverse foreign-citizenship test applied by SARS which challenges expats to a game of chicken. There are many problems with this stipulation.

For one – many hopeful emigrants who had hoped to use their nest eggs to secure a new life abroad are prohibited from doing so. Additionally, individuals who emigrate within the three years leading up to their retirement may have a hard time moving the proceeds of retirement monies abroad given local legislation around the treatment of retirement money post-retirement.

The key issue is that while there is existing legislation and regulation around the issue, a full three years has not passed since the new rules were introduced in March 2021. While there have been numerous court cases and other challenges which oppose the new regulations, the application and feasibility of the new system has not run its course to fruition and allowed actual testing in a court of law.

South Africa’s legislation is such that any bill, regulation or piece of legislation may be challenged in court and could subsequently be deemed unconstitutional, require alteration, or impose scrutiny on other parts of legislation – but such a process is not possible until it has transpired.

What are your options?

For those who are still tax residents of South Africa, or those planning on emigrating, the key is to get all your paperwork and documentation in order. A comprehensive assessment of your assets, an understanding of local and international legislation and tax regulations as well as a grasp of local and offshore financial services sectors is key to planning your financial exit with care.

You want to secure the highest possible transfer amounts for your assets, limit administration and penalty fees, and achieve this within the fastest time.

If you need help with your cross-border finances, forex or taxes, leave your details below and Rand Rescue will get in touch for a free consultation to discuss your options.

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