The South African Revenue Service has bolstered its tax collection capabilities and created a dedicated SARS unit responsible for improving the tax compliance of wealthy individuals and organisations employing complex, and often offshore, financial arrangements. Paul Roper explores what this means for HNWs and organisations in the context of their offshore wealth.

Following recommendations by the Davis Tax Committee, it was anticipated that SARS (South African Revenue Service) would be introducing a wealth or solidarity tax. Wealthy South Africans would have been relieved that this was not mentioned by Finance Minister Tito Mboweni in his Budget Speech of 24 February 2021. However, the fact that the Treasury is allocating some R3 billion to bolster SARS’  tax collection capabilities, and creating a dedicated SARS unit responsible for improving the tax compliance of wealthy individuals and organisations, making use of complex financial arrangements, does merit some attention.

Not a South African phenomenon

High net worth tax units are not just a South African phenomenon, they are seen in many other nations who, like South Africa, wants their slice of the pie. But, before exploring what the newly introduced high net worth tax unit means for wealthy and HNW advised clients both in South Africa and for South African expats, it is important to understand the South African economic context.

According to New World Wealth’s 2020 SA Wealth Report, there are approximately 38,400 millionaires or high net worth individuals (HNWIs) living in South Africa — a figure which in 2010 stood at 48 600 HNWIs (people with a net worth over USD1 million). HNWIs represent less than 1% of the South African population; the top 1% owns 55% of South Africa's personal wealth. So, for South Africa, which is the most economically unequal country in the world according to the World Bank, this diminishing slice of the pie is needed to satisfy the increasing socio-economic needs of South Africa’s population.

A focus on complex financial arrangements

For expats who have already emigrated and externalised their centre of economic interest from South Africa, there is likely to be little or no impact. HNWIs who are resident in South African will, however, find themselves under greater scrutiny from SARS. Therefore, they should focus in on their assets and structures to ensure that these are up-to-date, properly advised and stand scrutiny in terms of integrity and compliance. To the extent that this has not been an ongoing process, the announcement must catalyse a thorough review. There is a strategic risk for HNWIs if they have not been compliant previously. They need to be prepared and must be proactive on this. Whatever advice that they have been given has to be seriously reviewed in terms of the changed context. The law has changed, the focus has changed, perceptions have changed. It is a completely changed context.

SARS has announced that it will be assessing wealth ‘derived from multiple sources’ and these individuals ‘employ complex, and often offshore, ‘financial arrangements’. South Africa was an early adopter of Common Reporting Standard in terms of participating countries, having signed up in 2015. This means that information on overseas investments and trusts is already at SARS’ fingertips. The integrity of trust structures and investments should be considered with a focus on compliance, to ensure that this is undertaken by suitably qualified professionals, who have a comprehensive understanding of the complexities of the South African and offshore trust landscapes. Whilst the ultra HNWIs are likely to have a dedicated team of advisors, the HNW community may not, which will drive demand for bespoke expertise.

Cause for a great emigration?

Wealthy South Africans make up a significant portion of the tax base and provide a source of employment. The focus on HNW South Africans has been ongoing for many years with lifestyle audits and the like. Although it may have been SARS’ long-standing commitment to target wealthy South Africans, this is clearly a more focused approach with greater financing and additional dedicated resources. Despite attempts from other countries to target HNWs for immigration, we do not predict that this scenario will catalyse a great emigration. Emigration is a trigger for South African capital gains tax and a person’s tax affairs will have to be current before emigration is permitted. It must be borne in mind that every destination is going to want at least some tax. 

The bolstering of SARS’ tax collection capabilities and creation of a dedicated SARS unit is not likely to have been met with a positive reception by wealthy individuals, and organisations making use of complex financial arrangements. There is no doubt that the activities of this unit have begun with earnest and there is now little choice for HNWs but to have a comprehensive review of their affairs. We have heard from clients that SARS has a team of dedicated individuals who are already beginning to make contact. Early feedback has likened initial interactions to those with a private banker. If SARS can achieve professional relationships with HNWIs, rather than ones of variance, then it is a win-win for both the taxpayer and SARS.

With the average South African HNWI currently holding around 20% of their wealth offshore (New World Wealth’s 2020 SA Wealth Report) and SARS focusing on complex, and often offshore, ‘financial arrangements’, residents will need to ensure that their structures are up-to-date, properly advised and able to stand scrutiny. Jurisdictions, such as Jersey, can provide safe, secure and flexible legal and regulatory frameworks which can adapt to changing market conditions and assist HNWs keep their assets safe and secure.