Investors living and registered for tax in Namibia, who invest in South African unit trusts, are taxed in South Africa on their South African-sourced interest and dividends but are exempt from paying tax on capital gains. Carla Rossouw, head of Tax, explains the tax regime, estate duty and executor requirements applicable to Namibian residents invested in South African unit trusts.
Are Namibian investors liable for tax on their South African unit trust investments in Namibia?
Namibia has a source-based tax system, which means that income from a source within Namibia or deemed to be within Namibia, will be subject to tax in Namibia, unless a specific exemption applies.
From a Namibian tax resident’s perspective, South African dividends are viewed as “foreign dividends” and not subject to income tax in Namibia.
Foreign interest (from anywhere in the world) is treated as being from a Namibian source and, as a result, subject to income tax in Namibia. As the interest earned in South Africa by a Namibian tax resident may be taxed in both Namibia and South Africa, a Namibian tax resident may claim a credit against their Namibian tax liability for the tax imposed by South Africa on the South African-sourced interest. This relief is provided for in the double taxation agreement (DTA) between South Africa and Namibia (Article 23 – Elimination of Double Taxation) and may not exceed the Namibian tax liability.
Namibia does not currently impose tax on capital gains, irrespective of whether the gain results from the sale of Namibian or foreign assets.
Why are Namibian investors exempt from paying tax on capital gains in South Africa?
Capital gains realised by non-residents on South African investments will not attract capital gains tax (CGT) in South Africa. This is because non-residents are only taxed on capital gains realised on immovable property located in South Africa. South African unit trusts are not regarded as immovable property and are therefore exempt from CGT.
Tax on interest and dividends from a South African source
South African-sourced interest can be subject to income tax or interest withholding tax (IWT), while South African-sourced dividends are subject to dividend withholding tax (DWT):
Income tax on interest
South African-sourced interest is subject to income tax in South Africa if a Namibian investor remains in South Africa for more than 183 days during the tax year and they do not conduct business in South Africa. If the investor is a natural person, they will qualify for an annual exemption of R23 800 (i.e., R23 800 of the South African interest will not be taxable).
Interest withholding tax (IWT)
South African-sourced interest is subject to IWT in South Africa if a Namibian investor remains in South Africa for fewer than 183 days during the tax year.
As a product provider, Allan Gray is obligated to withhold IWT from the investor’s South African-sourced interest and pay it to the South African Revenue Service (SARS) on their behalf. The default rate at which we deduct IWT is 15%. However, a Namibian resident may qualify for a reduced rate of 10%, according to the DTA between Namibia and South Africa, if they provide their product provider with the required declaration.
Dividend withholding tax (DWT)
Allan Gray is also obligated to withhold DWT from a Namibian investor’s South African-sourced dividends and pay it to SARS on their behalf. The rate at which we deduct DWT for Namibian investors is 15%.
Estate duty and executor requirements
Are Namibian residents liable for estate duty in South Africa on South African investments?
Estate duty in South Africa is levied upon the dutiable amount of the worldwide estate of each person. However, in the case of non-South African residents, there are certain exemptions in this regard, but but they are not applicable to South African unit trust investments. Therefore, these types of investments are included in the calculation of estate duty for Namibian residents.
An amount of R3.5 million is deducted from the net value of the estate to determine the dutiable value of the estate. Estate duty is levied on the dutiable value of an estate at a rate of 20% on the first R30 million and at a rate of 25% above that limit.
Will South African estate duty still apply if an investor invests in South African unit trusts via a Namibian platform?
Yes. It is important to remember that an investor remains the beneficial owner of the unit trust investment (a South African asset for estate duty purposes), albeit held in the name of an independent nominee company on their behalf. Upon death of the investor, the unit trust investment will therefore fall into their South African estate and be dealt with in South Africa by their executor in terms of the Administration of Estates Act. In 2016, SARS clarified the application of estate duty in this scenario via the publication of SARS Binding Private Ruling 217. The ruling has since expired but provides insight into SARS’s general prevailing practice and interpretation of the South African Estate Duty Act.
What process will a Namibian executor need to follow upon the death of an investor?
As South African unit trust investments are considered property within South Africa, such assets will have to be dealt with in accordance with the Administration of Estates Act (“the Act”).
The Act requires that a letter of executorship be issued by the South African Master of the High Court (“the Master”) for the appointment of an executor. However, Namibia is a proclaimed state, which means that instead of obtaining a letter of executorship from the South African Master, a letter of appointment issued in Namibia can simply be signed and sealed by the Master. Once the foreign letter of appointment has been signed and sealed in terms of the Act, the person appointed in terms of the foreign letter of appointment is deemed to be an executor to whom letters of executorship have been granted, for purposes of administering the South African assets of the deceased.