What now?

With the amnesty applications now put to bed, and (hopefully) only the formal approval being awaited, applicants are now turning their attention to post-amnesty tax planning.

The starting point is usually: "How do I structure my affairs so that I will not pay tax on my offshore investments," says Ernest Mazansky, a director at Werksmans Tax.

"Despite the fact that, as a tax consultant, clients see my primary objective as being how to save them tax, nevertheless I always find this approach to be a tad amusing in relation to offshore assets."

The reason for this is that, no doubt because of our history of operating on a source basis of taxation, taxpayers have this view that if it's offshore it must be tax free.

And this view continues to prevail despite the fact that, as far as passive income is concerned, we have operated on a worldwide basis of tax for the past seven years, ie since 1July 1997.

What amuses me is that taxpayers are totally resigned to the fact that interest on a debt instrument or rental on immovable property or a capital gain on the disposal of a share is fully taxable if the asset is in South Africa, but ought to be fully tax free if an almost identical asset is located abroad!

The starting point, therefore, when it comes to postamnesty tax issues, is that everything is fully taxable, and being exposed to the tax is the price one pays for the authorities closing the door on the past.

But being exposed to the tax and actually paying tax on an annual basis are not necessarily the same thing.

"In my view it is counter-productive, and frustrating for investors in the extreme, if investors have as the starting point the idea that offshore income and gains can be tax free."

Rather one should be looking at ways to defer the tax for as long as possible (and depending upon one's circumstances this could be for decades) or "converting" income into capital so as to avail of the lower rate of CGT compared with the higher rate of income tax.

Moreover, depending upon the circumstances, one should also be structuring one's affairs so as to access any foreign tax credits which can be offset against the South African tax payable on that income, to avoid the possibility of double tax.

There are various products which might achieve this result. The pat answer is to use an offshore insurance wrapper.

"A problem I have with this solution is that it is becoming offered so widely and so volubly that the SARS cannot ignore it.

"And if you do wish to use this option I would suggest that it be very carefully looked at and structured so as to minimise any chances of a successful attack by the SARS on the structure which, most investors who held a meaningful amount of funds illegally offshore had set up offshore trusts to hold their investments.

In some cases the trust's sole asset was an investment in an offshore company which held their investments.

In either case, in order to avail of the amnesty, the applicant made an election to deem the assets of the trust to be his or hers. The tax consequence was a little different depending upon the precise structure.

Where the various assets (bank accounts, unit trust investments, etc,) were held directly by the trust, these individual investments were deemed from 1March 2002 to be held by the applicant himself or herself, and any future income thereon would simply be taxable in the applicant's hands.

Where the investments were all held in an offshore company whose shares were held by the trust, the offshore company is deemed to be wholly-owned by the applicant.

This renders the offshore company to be a controlled foreign company (CFC) so that the income and capital gains of the CFC are simply taxed in the applicant's hands.

There are some different tax consequences arising out of the different holdings, particularly in relation to matters such as the treatment of foreign exchange gains and losses.

But what is common to both is that any disposal by the trust of its assets has the result that the applicant is then deemed to have disposed of those assets at market value.

This rule does not apply to assets disposed of by the CFC, and only to the disposal of the CFC itself.

Any such disposal will give rise to a capital gain or loss in the applicant's hands. But what is more important is that the mere fact that the asset is no longer deemed to be owned by the applicant does not mean that the applicant is no longer taxable on the income and capital gains.

All it means is that instead of the applicant being taxable as the deemed owner of the asset itself, or of the CFC owning the asset, the applicant will thereafter be taxable under a different anti-avoidance section which deems any income of the offshore structure to be that of the applicant as a result of his or her original donation to the structure.

Once again, while in broad terms the result is identical whether the investor is the deemed owner or is merely taxable by reason of his or her donation, there are some tax consequences which are different.

For example, any dividend from an offshore company held by the trust but deemed to be held by the investor as a CFC will, from 1March 2005, willy nilly be free of tax in the investor's hands.

But if those shares are no longer deemed to be held by the investor and the dividend is attributed to him or her by reason of the donation to the trust, that exemption will not be available.

"There are no pat answers to restructuring to save tax. Rather one needs to consider very carefully the alternatives and decide on a strategy which has the best long term benefits rather than, what may turn out to be, short-term advantages."