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Here's how to turn foreign dividend funds into a tax deduction if you can't get the funds into South Africa

by , 12 June 2015
Even though SARS wants to tax income as soon as it's due or as soon as you receive it, today we remind you about a certain rule that applies for foreign income and which many people forget.

Here's the trick!

If you can't send any foreign income to South Africa because of exchange controls or other restrictions, you don't need to pay tax on it in South Africa until you're able to send the funds (Section 9A(1) or Section 9A(3) for controlled foreign companies).

As a consequence, this allows you to match the cash outflow of any South African taxes due on foreign income, with the cash inflow from funds sent to South Africa. Thus, you'll have the funds available to actually pay the tax.

Note that this particular aspect is very important since this provision supplements the tax rules where your foreign dividend isn't completely exempt and has a taxable portion (Section 10B(3) of the Income Tax Act).

Moreover, keep in mind that it doesn't apply to any exempt foreign dividends (or exempt portion), as it's not part of income. Income typically means Gross Income less Exempt Income.

For partially exempt foreign dividends, you can deduct the amount of the taxable foreign dividend if you can't send the funds to South Africa in the same tax year.

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Farandwide (Pty) Ltd holds shares in a number of foreign companies in different African countries. During the year, Farandwide earns taxable dividends from all of these foreign companies of R1 500 000. But, the dividend from the Moroccan company can't be sent because of some unusual exchange controls coming into play.

In Farandwide's 2015 ITR14 (ignoring all other income and deductions), they'll show the following:

1) Foreign dividends: R1 500 000

2) Less: Partial exemption (R696 428) (R1 500 000 x 13/28)
3) Less: Section 9A(1) deduction (R267 857) (R500 000 – R232 142)
4) Taxable income R535 715

Let's say during the 2016 year Farandwide earns foreign dividends of R2 000 000. They can send all the foreign dividends, and they can send the R500 000 foreign dividend from Morocco to South Africa.

In their 2016 ITR14, they would then show the following:

1) Foreign dividends: R2 000 000
2) Add: Section 9A(2) deemed received R267 857
3) Taxable income R2 267 857

Don't forget to add back the deduction in the year your business actually can remit the funds to South Africa! SARS will keep track of these, and will raise a query if you don't

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