Types of South African taxes

Source: Mervin Messias

Chairperson: Estate Planning Committee, Law Society of the Northern Provinces

A resident of South Africa is taxable on worldwide income. A resident is defined as a:

·          natural person who is an ordinarily resident in South Africa;

·          natural person who is physically present in South Africa; or

·          company, corporation or trust that is incorporated, established, formed or which has its place of effective management in South Africa.

A resident excludes:

·          a natural person, who was previously regarded as a deemed resident, if physically absent from South Africa for a continuous period of at least 330 days from the date of departure; and

·          an international headquarter company.

Apart from income tax, South Africa has capital gains tax, donations tax, estate duty, transaction taxes and secondary tax on companies and corporations (a withholding tax levied on companies or corporations that pay dividends to shareholders or members). There are withholding taxes on royalties to non-residents but not on interest or dividends.

Income tax

Income tax is imposed on a resident’s worldwide income, at the following rates:

Interest received by or accrued to a non-resident is tax-exempt provided the individual is physically absent from South Africa for at least 183 days and does not carry on business in South Africa during the year of assessment. Interest received by or accrued to any company managed or controlled outside South Africa is tax-exempt unless such company carries on business in South Africa (such as branches of foreign companies). Dividends received by non-residents are tax exempt. Royalties that are subject to Double Tax Agreements and paid to non-residents are subject to a final withholding tax of 12% (Residents require the approval of the Department of Trade and Industry and Exchange Control for payments of a royalty to a non-resident). Non-residents are taxed on South African source income.

Capital gains tax

Capital gains tax is imposed on a resident’s worldwide assets at the following maximum effective rates:

Generally, a primary residence up to a value of R1 million is excluded. The rate applicable to trusts may be reduced to that applicable to individuals by distributing capital gains to individual beneficiaries. Capital gains tax, triggered on disposal of an asset, applies to a non-resident’s immovable property or assets of a permanent establishment in South Africa.

Donations tax

Generally, donations tax is levied at a rate of 20% on the value of any property disposed gratuitously by a South African resident or domestic company or domestic corporation. Exemptions include donations by a natural person up to R30,000 per annum, property disposed of under and in pursuance of any trust, donations between spouses not separated, and donation of property or a right in property situated outside South Africa if acquired by the donor before becoming resident in South Africa for the first time, or by inheritance or donation from a non-resident.

Other

Estate duty is levied on estates at a rate of 20%. Exemptions include the first R1,500,000 of the estate and any bequest to a surviving spouse.

Secondary tax on companies and corporations is levied at a rate of 12.5% on dividends declared by a company or corporation.

Transaction taxes include:

·          Value-added tax levied at a rate of 14%;

·          Transfer duty, calculated on the full purchase consideration, levied on the transfer of immovable property (The rate for individuals is calculated on a graduated scale, maximum rate of 8%. The rate for companies, corporations and trusts is 10%); and

·          Stamp duty levied on the issue or registration of transfer of shares or members interest at a rate of 0.25%.

Taxation of Trusts

The Income Tax Act contains specific provisions dealing with taxation of trusts. A trust is taxed at a flat rate of 40% on income and an effective rate of 20% on capital gains. For income tax purposes it is granted separate personality and is considered as a separate taxpayer from the trustees or beneficiaries.

Income tax legislation applicable to trusts recognizes the “conduit pipe principle”. Income that accrues to a trust and subsequently vests in a beneficiary in the same fiscal year will retain its character in the hands of the beneficiary. Losses occurring in a trust may not, however, be transferred to beneficiaries. Where income in any year vests in a beneficiary, this income is included in the beneficiary’s total gross income. Where the income is retained in the trust, the trust is taxed on such income and the balance remaining is capitalized.