Capital Gains Tax poses pitfalls for visiting expatriates

The introduction of capital gains tax (‘CGT’) has created a problem for expatriates on extended assignments in South Africa, according to Tim Desmond, executive consultant with Durban law firm Garlicke & Bousfield Inc.

Desmond says the potential tax exposure has been identified as discouraging foreigners with scarce skills from accepting such assignments. The 2005 Budget Speech announced amendments to the Income Tax Act, to make South Africa more competitive in attracting skilled expatriates and these should soon be made public.

The potential problem, says Desmond, arises if a foreigner is regarded as a South African tax resident.

This can happen through the application of the so-called ‘physical presence test’. A person working in South Africa can meet the requirements of this test in their fourth tax year in the country. They will be regarded as a resident from the first day of the tax year in which they meet the requirements. When they leave South Africa, they will, in due course, cease to be a resident as from the date that they left the country.

An expatriate regarded as a South African tax resident will firstly be liable to South African income tax on his worldwide income (subject to any double taxation agreements). The potential CGT exposure may, however, be more serious.

Desmond says as from the date that the expatriate becomes tax resident, all of his worldwide assets will fall into the South African CGT net.

When he completes his assignment and leaves South Africa, he will effectively realise any appreciation in the market value of his assets during the period that he was a resident. This appreciation will be subject to CGT. There are exclusions to the relevant deeming provisions, such as South African immovable property and certain employee share incentives.

There are two alternatives to avoid the above problem. The definition of ‘resident’ could be amended to allow expatriates to stay in South Africa for extended periods without becoming residents. Alternatively, the CGT deeming provisions could be amended to exclude some or all foreign assets in the case of visiting expatriates.

Whichever method is chosen, it is certain to contain anti-avoidance provisions. The legislation will seek to balance the need to attract skilled expatriates while not providing too broad an exclusion from South Africa’s worldwide system of taxation.

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