The following article provides an overview of the taxation of a life assurance or capital redemption bond held by a South African resident.
General information regarding life assurance in South Africa
In South Africa there is not a legal definition of what amounts to life assurance. For example, there is no requirement to have a specific level of life cover or risk.
General information regarding South African residents
South African tax residents are taxed on their worldwide income whereas non-residents would only be liable to tax on any income sourced or deemed to be sourced in South Africa.
South African tax residents are taxed on capital gains on their worldwide assets whereas non-residents would only be liable to tax on gains on any assets or real estate in South Africa.
Definition of residency
In order to determine the tax liability of a person in South Africa it is necessary to establish whether that person is a "resident" as defined in the Income Tax Act 1962 (ITA). With regard to individuals, residence means either ordinary residence (the ordinarily resident test) or a natural person who is physically present in South Africa for a specified period (the physical presence test).
This concept means that a person is a resident of South Africa if his/her permanent home is in South Africa. An ordinary resident in South Africa is taxable on their worldwide assets.
The South African courts have held that the concept "ordinarily resident" is described as:
- Living in a place with some degree of continuity, apart from accidental or temporary absence. If it is part of a person's ordinary regular course of life to live in a particular place with a degree of permanence, he/she must be regarded as ordinarily resident;"
- The place where his/her permanent place of abode is, where his/her belongings are stored, which he/she leaves for temporary absences and to which he/she regularly returns after these absences;
- A residence that is settled and certain and not temporary and casual; and
- Where a person normally resides, apart from temporary/occasional absences.
A person will not be taxable in South Africa on any income that accrued from a source outside South Africa prior to the date on which he/she becomes ordinarily resident in South Africa, unless such person is regarded to be a resident by virtue of the physical presence test.
If an individual is not classed as ordinarily resident they may be regarded as a South African resident for tax purposes if they are physically in South Africa for a period exceeding:
- 91 days in aggregate during the year of assessment under consideration;
- 91 days in aggregate during each of the five years of assessment preceding the year of assessment under consideration; and
- 915 days in aggregate during the above five preceding years of assessment.
All three requirements above have to be met before a person will be regarded as resident. Partial days are also counted.
Tax implications for existing Old Mutual International Isle of Man policyholders moving to South Africa
Old Mutual International Isle of Man offers life assurance and capital redemption bonds. There is no tax to pay whilst the bond(s) remains invested with Old Mutual International Isle of Man (including switching).
Any gain (proceeds less premium) on encashment will be liable to capital gains tax (CGT). These will be calculated as described later in the section below headed capital gains tax (CGT). Encashment, whether on death, full surrender or maturity, will be taxed in the same way.
Income is taxed on progressive rates. In 2017/18 the first ZAR 0 – 189,880 of taxable income will be subject to tax at 18%, whilst at the top end, income at ZAR 1,500,001301 or above will be subject to income tax at 45%. See tables below for more details:
Tax rates for individuals and special trusts: 2017/18
Tax is payable at a rate of 18% for taxable income between ZAR 0 – 189,880. For all other income there is flat rate of tax that is payable plus a percentage amount which varies dependant upon which income bracket the taxable income falls within, as detailed below
Taxable income (ZAR)
Rates of tax (ZAR)
R0 - R189 880
18% of each R1
R189 881 - R296 540
R34 178 + 26% of the amount above R189 880
R296 541 - R410 460
R61 910 + 31% of the amount above R296 540
R410 461 - R555 600
R97 225 + 36% of the amount above R410 460
R555 601 - R708 310
R149 475 + 39% of the amount above R555 600
R708 311 – R1 500 000
R209 032 + 41% of the amount above R708 310
R1 500 001 and above
R533,625 + 45% of the amount above R1 500 000
Tax rates for trusts, other than a special trust: 2017/18
45% on each rand of taxable income
Capital gains taxed (CGT)
The assessment of gains for both residents and non-residents is based on calculating the true profit or loss. This includes:
- any currency gain or loss, on disposal of an asset
- deducting any exemptions/exclusions, allowances, or losses
- applying any limitations to those losses and carrying forward any unused losses from previous years totalled for the tax year.
There is an annual exclusion of ZAR 40 000 (2017/18) for individuals and special trusts.
Subtracting the aggregate losses from the aggregate gains results in the net capital gain amount.
The taxable net gain is then a proportion of the net capital gain (known as the inclusion rate). This is currently 40% for individuals and special trusts and 80% for trusts other than special trusts.
This amount gets included as taxable income and is subject to the progressive tax rates for income tax.
Given that the maximum effective rate of income tax for individuals is 45%, the maximum effective CGT rate for individuals and special trusts of a net capital gain is 18% (40% x 45%) and 36% for other trusts (80% x 45%).
The calculation for CGT includes any gain or loss arising out of currency fluctuations. The buying and selling costs of a bond must be converted at the average exchange rate prevailing in the year of purchase and the year of sale of the bond respectively. This means any currency gain or loss will be included for CGT purposes.
Inheritance tax and gift tax
South Africa has both inheritance tax (known as estate duty) and gift tax (known as donations tax).
Estate duty is levied at a rate of 20%. An initial ZAR 3.5 million is exempt, together with any amount accruing to a spouse or public benefit organisation.
Donations tax is also levied at a rate of 20%. An initial ZAR 100 000 in any tax year is exempt, together with any amount donated to a spouse or certain public benefit organisations.
The donor of a gift is primarily liable for donations tax and a decedent's estate is primarily liable for the estate duty.
Resident individuals are subject to South African donations tax on gifts of their worldwide assets and the worldwide estate of a resident individual is subject to South African estate duty. Non-resident individuals are not subject to South African donations tax and only assets which are situated in South Africa will be assessed for taxation.
A double taxation treaty on inheritance tax exists between South Africa and the United Kingdom.
There is no wealth tax in South Africa.
Trusts are recognised in South Africa. In order to be valid, a South African trust must be registered with the High Court in accordance with the Trust Property Control Act 1988. A trust is defined in the ITA as ‘any trust fund consisting of cash or other assets which are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person’.
Trusts are generally treated as an entity for taxation and have their own rates. There are ‘special trusts’ defined in the ITA which receive beneficial tax treatment. These fall into two categories:
Trusts for those suffering from mental illness or physical disability
These receive preferential CGT treatment for annual exclusion, the inclusion rate, personal use of assets exemption, and compensation for personal injury, illness or defamation. The income tax rate is also equal to that for individuals.
Testamentary trusts for relatives who are minors
These receive preferential CGT treatment for the inclusion rate and the income tax rate is equal to that for individuals.
The Treasury has published revised exchange control amounts which now consolidate the investment allowance of ZAR 10 million per annum together with the travel allowance, holiday allowance etc of ZAR 1 million. As a result the exchange controls now give an annual allowance of ZAR 11 million which does not require approval.