The R50 million checkbox you do not want to tick

If you sign up this writer as your financial advice client, then you can be sure of one thing: it will be a long, long time before you have to explain the consequence of ticking the “does your net worth exceed ZAR50 million” checkbox on an annual income tax return. You may, however, have to explain this AIT ‘thing’ that the South African Revenue Services (SARS) introduced, suddenly, from 24 April 2023.

No surprises here, you were warned in 2020…

In the absence of a personal financial or tax adviser, this writer got the ‘low down’ on AIT at a recent pre-indaba workshop, hosted jointly by Tax Consulting SA and the South African Institution of Taxation (SAIT). At the event, Ashely Clüver, Africorp Treasury Manager and Jashwin Baijoo, Head of Strategic Engagement and Compliance at Tax Consulting SA discussed the Approval for International Transfers (AIT) process and developments around it. The discussion started with an acknowledgement that the introduction of AIT had been telegraphed by National Treasury as early as its 2020 Budget Review, when it spoke of increased scrutiny of verification items, specifically for cross-border transactions. 

According to Baijoo, the introduction of AIT for transactions exceeding ZAR1 million “forms part of SARS’ strategic intent to make non-compliance difficult and costly”. He warned that the standard requirement of a three-year history of taxpayers assets and liabilities, local and foreign, and at base cost and market value was no longer adequate; in practice, SARS can demand that the applicant cycle back five-, 10-, or even 15-years. “It can become a very stringent process, and we have noticed that the verification of taxpayers’ information is higher depending on the amount they are seeking to transfer and the number of income sources,” he said. 

Pay attention, financial and tax advisers, it is no longer adequate to indicate “my bank account” in source of funds; SARS is going to want dividend statements, royalty recons, salary slips etc. It does not take much imagination to see the AIT application process through the receiver’s eyes. Imagine, for example, a SARS official sitting with five-years-worth of your IRP5 files in one hand, and your or your client’s AIT request to transfer ZAR5 million in the other. Then ask: does the income on the IRP5s and other income sources per the taxpayer's annual filings reconcile with the amount that the taxpayer is trying to transfer cross-border? 

Does this offshore transfer compute?

Clüver said that the introduction of the AIT process had caused “quite a lot of panic” in the market, adding that a lot of tax advisers and wealth managers were on the phone trying to figure out their approach to the change. “It is overall fair: SARS is trying to find out whether the capital amount that the applicant is applying to take out of the country make sense in the context of their financial situation,” she said. “Additionally, SARS is making sure that the applicable tax been paid on that capital”. The panel moderator challenged both tax experts to reflect on the SARS methodology and process with reference to the three pillars upon which the AIT was based. 

Forget that ‘show me the money’ chant popularised in the 1996 Hollywood blockbuster, Jerry Maguire; SARS is all about ‘follow the money’. According to Baijoo, the first pillar is the source of funds, for which you have to provide supporting material. “The AIT then considers your client’s assets and liabilities declaration, and there your bare minimum standard is to offer a three-year history,” he said. The last pillar deals with the destination of the funds in the AIT, that must include country, investment house, investment type etc. “In some instances, additional information can be requested as to the fiscal benefit of the investment to South Africa, for example, will you repat your interest or will there be future encashment that flows back into the local economy,” Baijoo said. 

From tax diagnostic to reasonability test

If you are completing an AIT, or assisting a client with doing so, these three pillars are the minimum required. However, there are some additional risk mitigation steps you might consider. “From a tax practice management standpoint, and we are not saying this is the only way to do it, your first step should be a tax diagnostic at client onboarding,” Baijoo said. This process goes way beyond simply asking your new client to share their financial and tax information. You need to log into the taxpayer’s SARS e-filing account and check his or her tax records; check with the Companies and Intellectual Property Commission (CIPC) for any directorships; and the Directorate for Non-Profit Organisations etc. 

Do as deep a dive as possible because SARS has sweeping intra-organisational information exchange capabilities. Tax Consulting SA suggests adding another step to onboarding, namely asking your new clients for their assets and liabilities statements for the last three years as a bare minimum. You can then run a reasonability analysis on this summary against the tax diagnostic you have just completed. “From a risk mitigation perspective this makes sense for both client and adviser; remember when it comes to disclosures, and the potential of falsification of information, there is liability that can be imputed to the adviser,” Baijoo said. 

Clüver opined that the financial and tax compliance landscape had changed in light of South Africa’s grey-listing, in effect since February 2023. “A lot of companies, and obviously SARS themselves, are trying to figure out how to mitigate risks, how to ‘suss out’ money laundering through their anti-money laundering protocols; grey-listing is a huge driver of compliance,” she said. Going forward, taxpayers that make use of the AIT process will be under tight scrutiny. It is also increasingly likely that SARS will request additional information from those looking to transfer money offshore. “They are asking for the costs, they are asking for your foreign assets and now [they can even come back saying] your ID number is linked to certain entities … explain,” Clüver said. 

Age of secret offshore accounts is over

Apparently, the days of hiding bank accounts from your financial or tax adviser, and especially SARS, are over. “People used to refuse to give you access to a bank statement because they did not want SARS to know about it; under today’s common reporting standards your ID number is linked to every bank account you own, around the world,” Clüver concluded. This warning was echoed by Baijoo, who said taxpayers had to disclose absolutely everything these days. And that means telling your financial or tax adviser about both your offshore bank accounts, not just the one in Cyprus or the one in Switzerland. “SARS knows you have offshore accounts,” he concluded. And when you do an AIT, and SARS discovers big balances offshore, they are within their rights to demand an accounting for those funds too. 

Writer’s thoughts:

The introduction of the Application for International Transfer (AIT) process for cross-border transfers exceeding ZAR1 million will be a game changer for high net worth (HNW) individuals trying to avoid SARS. Agree or disagree. And have you run into hiccups around the AIT process? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za

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