How does the advisory landscape in South Africa compare to other offshore jurisdictions?
The South African market is very different to most of Old Mutual’s other offshore offices. The South African advice market has already been through a lengthy and complex transformation process, akin to that of the Retail Distribution Review in the UK. The shift to a commission-free environment will be finalised during 2017.
Also, this will impose new minimum qualification levels on advisers, which many have already embraced. This is raising standards across the board. As such, we don’t face the regulatory upheaval that some regions have ahead of them. There is still some way to go, but South Africa is much further along the journey than most.
Has this been a significant change for the advice industry?
Certainly, it has made our industry a lot more professional, especially with advisers having to qualify in order to write certain types of business, for example investment business or risk business.
What are the big issues affecting the market at the moment?
The moves towards a common reporting standard are having an impact worldwide and, as a result, the South African market too. This standard is designed to facilitate the exchange of financial information between tax jurisdictions and makes it far more likely that undeclared offshore assets held by South Africans can be discovered. As part of this, the South African authorities have launched a special voluntary disclosure programme (SVDP) that allows people to legalise their undeclared offshore assets. There are penalties which will be payable.
The SVDP was announced by Finance Minister Pravin Gordhan in his last budget speech. He saw it as an opportunity for non-compliant taxpayers to disclose offshore assets and income voluntarily. It also offers some relief from exchange control contraventions.
Has this happened before?
Yes. It happened in 2003, when South Africans with undeclared offshore assets were granted a full amnesty. 43,000 participated and it resulted in a large amount of money being disclosed to the fiscus around R64bn. And raised a further R2.9bn in levies for the South African fiscus. This one has the potential to yield a similar amount.
How will it work in practice?
The South African Revenue Service and the South African Reserve Bank aim to assess tax non-compliance and exchange control contraventions in one joint process.
Individuals and companies can apply for the SVDP. They will have to pay penalties and part taxation, but not such onerous penalties and potential criminal prosecution if they are caught once the SVDP closes. After the undergoing this process, the assets become ‘clean’. It serves a dual purpose: the authorities know where the assets lie and investors can sleep peacefully at night.
Provision is also made for donors, settlors or beneficiaries of trusts to apply for the SVDP, however, slightly different rules apply to them in some instances.
Do you see this as an opportunity for Old Mutual International?
Certainly, it is an opportunity for advisers, and for Old Mutual International (OMI) by extension. Many advisers are encouraging their clients with undeclared offshore assets to take up the SVDP, as are the lawyers and accountants with whom they have ties.
Once they have legitimised their assets and paid the necessary taxes and penalties, they would need to consider whether their assets are working as hard as they could. For instance, are they invested in the correct vehicle to suit their specific needs? In which types of assets are they invested? Are there any tax advantages? At OMI in SA, we have a life wrapped solution, called Investment Portfolio+, which offers benefits around tax administration with beneficial tax rates; estate planning features; and eliminating SITUS liabilities.
Is there anything still to be finalised?
The SVDP has been read into the South African parliament and the penalties and taxes payable are now clear.
For tax breaches, 40% of the highest value of all assets, at the end of each tax period, between 1 March 2010 and 28 February 2015 is included in clients’ taxable income. Income tax will be payable on this amount at their marginal tax rate.
For exchange control breaches; if the client repatriates the assets, a 5% penalty is payable. If the client decides to retain the assets offshore, a 10% penalty is payable. These penalties are calculated on the market value of the assets as at 29 February 2016. However, if the client is not paying the penalty from the assets which are already offshore, the penalty is 12%.
Are there any other major initiatives in the South African market at the moment?
The other major consideration is that the legislation around trusts is in the process of changing. Proposals have been made in the Taxation Laws Amendment Bill (TLAB) which have been followed by draft response documents, as well the Davis Tax Committee, where a second interim report on Estate Duty has been lodged.
Before any major decisions regarding offshore trusts are made, we propose that clients wait for legislation to be finalised as there is still a lot of uncertainty around, such as the funding of an offshore trust (should the loans be interest-free or interest-bearing? And in rand or hard currency?), transfer pricing (Section 31) etc.
Trusts will certainly still have a role to play; for example in the protection of assets from creditors, or for holding assets for minor children etc. But they may need to be looked at more closely for other purposes, such as estate and tax planning.
How are the end markets in South Africa developing? Is the advice market expanding?
In South Africa, the end market is not changing significantly. The high net worth still tend to invest directly offshore. Due to the weakness of the South African currency, the average South African investor, however, cannot afford to invest directly offshore.
However, for our market at OMI, our average premium is the equivalent of £300,000-£400,000. The advisers in this market tend to be wealth managers and private bankers. This is where we concentrate most of our efforts.