Situs Tax: What Is It? And Why Does It Matter?

Word on the street is that South Africans have around R3 trillion invested in offshore equities currently, with foreign flows continuing at a marked rate as wealthy South Africans look to build diversification and global protection into their wealth planning.  

Some South African investors choose to invest offshore indirectly, through rand-denominated options which offer foreign currency exposure while keeping funds in South Africa. Many, however, opt for physically taking funds out of the country by making use of the annual discretionary allowance of R1 million per South African resident older than 18. Others apply to the South African Reserve Bank to take out up to an additional R10 million a year per resident. These funds are then used to buy everything from offshore property to foreign equities and exchange traded funds (ETFs).  

 

So far so good. But there’s a snag.  

 

Usually these assets are purchased in the individual’s name - an approach that has far-reaching implications for wealth transfer when the holder of these assets passes away, thanks to something called Situs tax.  

According to Anthony Palmer, Group Commercial Director at Carrick Wealth, since many people hold offshore assets in their own name, and haven’t taken time to structure their estates accordingly, there are profound Situs tax implications awaiting their families. 

“When I speak to clients about this issue, more often than not their mouths fall open and their jaws hit the desk,” says Palmer. “They are usually holding US shares like Apple, Microsoft, Amazon, PayPal or Adobe, strong companies which people are happy to hold, and which have given them fantastic growth. Not only are these clients reluctant to sell these shares, they also don’t want to sell due to the capital gains tax implications.” 

What they also fail to plan for is Situs tax, on the tax payable on assets held by individuals when they pass. This is a tax people don’t know about and something they certainly need to be aware of when venturing into offshore investing,” says Palmer.  

In this three-part series, Carrick Wealth will take you through the ins and outs of Situs tax, it’s implications for your estate and how you structure your wealth around these implications. 

What is Situs Tax?

The word ‘situs’, which comes from the Latin for ‘site’, speaks to the location or place where an asset is located for legal purposes. Situs tax, therefore, relates to offshore assets which are based outside South Africa. As such, they incur their own tax liabilities on death – even if the holder is a non-resident in the country in question.  

In the US, the taxes levied on deceased estates are known as federal estate tax, and in the UK these are referred to as inheritance tax. Collectively, the taxes applicable to offshore assets are called Situs tax.  

What assets are subject to Situs Tax?

It’s not just global share portfolios that are impacted by Situs tax, it’s any asset which is deemed to be located outside South African borders. So this extends to bank accounts and property, as well as ETFs and mutual funds.  

“I was chatting to a client the other day who holds a popular ETF focussed on innovation which has made a lot of people a lot of money. The conversation turned to Situs and if the ETF was a Situs asset. The short answer is yes, it would absolutely be a Situs asset,” says Palmer. “Similarly, other US or UK ETFs are also Situs assets, and you’ll end up playing a lot of tax on those when the time comes, if you don’t plan properly.” 

In our next article we’ll explore the implications of Situs tax by looking at the US and UK examples in more depth.   

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