Separating Fact from Fiction – Considerations Regarding Binding Class Ruling 080

One of the biggest challenges of modern times is sensationalism, when facts are
misrepresented to create attention-grabbing headlines or to promote self-interest.

When such a situation occurs, it is vitally important to look beyond the headlines and try
to separate fact from fiction in order to see through the misconceptions that may have
been created.

Failing to set the record straight leaves people ill-informed and can result in them
making decisions on information which is untrue and may prove detrimental to them.

In this bulletin, a number of misconceptions in respect of Binding Class Ruling 080 will
be addressed. Once these are addressed and the balance of fact is restored, the
implications for clients and Financial Advisers will be explored.

Misconception number one: “SARS is a legislative body.”

This point is incorrect. SARS is governed by the South African Revenue Service Act, 1997
and is responsible for the administration of tax matters in the Republic.

As an administrative body, SARS is expected to be able to apply the relevant tax laws
and where necessary, provide Advanced Rulings to taxpayers based on their
interpretation of the law as per the Tax Administration Act 28 of 2011.

These Advanced Rulings are referred to as ‘Binding Rulings’ and can take the form of a
General, Private or Class Ruling. Importantly, Binding Class Rulings are instigated by the
taxpayer and not SARS and are there to assist the taxpayer in understanding how tax
may be applied to a proposed transaction based on a set of specific circumstances as
presented to SARS.

Misconception number two: “SARS instigates a Binding Class Ruling as a
result of an investigation into a particular practice.”

The words “binding” and “ruling” are powerful words as they are authoritative and
announce enforcement and legal application. However, it is vital to understand the
context of these words, the process that results in a SARS Ruling and the extent and
authority of a Ruling by SARS.

When considering the process that gives rise to a Binding Class Ruling, we find that the
law requires an applicant to make a formal application to SARS on behalf of a class of
person where that person has specifically requested the applicant to act on their behalf.
Furthermore, the application to SARS can only be for a proposed transaction which has
yet to take place.

As such, Binding Class Rulings are a result of an application brought to SARS in order to
get an indication of how a future transaction may be treated for tax purposes and not,
as popular belief would have you think, as a result of action by SARS on a particular
subject.

Misconception number three: “The Binding Ruling applies to all taxpayers in
the Republic.”

When dealing with misconception number three, nobody answers this question better
than SARS themselves who state that Binding Class Rulings are issued in favour of a
specified class of taxpayers in relation to a specific proposed transaction only.

Furthermore, SARS states that the Binding Class Ruling only has a binding effect on the
class members and does not constitute SARS practice. It does not apply to a third party,
and nor can any third party rely on it under any circumstances.

This confirms the explicit conditions of a Binding Class Ruling in that it cannot and may
not be applied to any situation or party other than those identified in the Class Ruling.

In short, Binding Class Rulings do not apply to all taxpayers and are specifically limited
to the parties that requested the Ruling based on the information they provided to
SARS.

Misconception number four: “Binding Class Rulings are published as a
warning to the taxpayer.”

When applying for a Binding Class Ruling, it is the responsibility of the applicant to
provide a statement of the Ruling being requested and the relevant statutory provisions
or issues, together with a confirmation of why they believe the proposed Ruling should
be granted.

The applicant is also required to put forward their interpretation of the relevant
statutory provisions and analysis, and whether or not they support the Ruling sought.
This is a critical point as the applicant does not necessarily have to agree with the class
member or support their view.

SARS’s ability to provide an accurate Ruling is subject to the application provided and
the content of such being sufficiently substantive and accurate. As such, SARS has the
right to withdraw the Ruling should it transpire that material facts were omitted from
the application.

As part of the process, where SARS forms a negative view, the applicant has the right to
discontinue the application. The result of such discontinuance is that no Ruling is made,
and nothing is binding on SARS, the applicant, or the class members.

Where a Ruling is accepted, be it positive or negative, such a Ruling is published for
general information purposes only, subject to the explicit consent of the class members.

It is also important to note that with any Binding Class Ruling, the published version
does not contain details that identify the parties involved to protect the rights of those
parties, irrespective of the Ruling, given that the publishing of the Binding Class Ruling is
purely for information purposes.

SARS confirms as the Binding Class Ruling is for general information purposes only, it
may not be cited in any dispute and its binding nature is limited as covered in
misconception number three.

Therefore, Binding Class Rulings are only published where those parties involved
specifically wish for it to be published i.e., with the consent of the class members. These
Rulings are then edited to remove the identity of parties and published for general
information purposes only.

Misconception number five: “The commentators know best.”

When considering the commentary in respect of the Ruling, it is vitally important to be
able to distinguish reporting that is factual and accurate versus reporting which is not.

The facts around Binding Class Ruling 080 are found in the published Ruling, which
states that the applicant is the founder of the Foreign Pension Trust, and they are a
South African resident company.

What is not made public is the identity of the applicant and the jurisdiction in which the
Foreign Pension Trust is established, other than that it is a foreign jurisdiction, or
whether it is a product that may legally be promoted in South Africa or not.

The Ruling also identifies a number of very specific characteristics that are associated
with the Foreign Pension Trust on which the Ruling is being sought. However, these
characteristics do not extend to the specific legislation or regulations under which the
Foreign Retirement Trust is written or not, as the case may be.

If you consider these facts and then think about the commentary from individuals and
parties that hold themselves out as experts, we find that a number of the points are
simply not supported by the facts in the Ruling.

As such, these views are not authoritative as they are not based on fact and are nothing
less than sensationalism and conjecture.

As to why the class members did not withdraw their application, given the negative
Ruling, and why they proactively consented to having it published is unknown. It makes
no sense to pursue the proposed transaction given the Foreign Pension Trust was
structured in a way, where the likely outcome would be adverse from a tax perspective.

Unfortunately, many readers do not stop to question the content or views of these
commentators, the motivations behind the application for the Ruling or those who
misconstrue or embellish the facts from such Rulings. As such, one should follow the
facts and not the commentators to avoid falling foul of misconception number five.

Don’t let the “tax tail wag the financial planning dog.”

One thing that is for certain is the tax laws will change from year to year, but the
financial outcomes that clients look for remain constant. When considering a bona fide
Foreign Pension, the benefits it provides to clients are significant and, in many cases,
superior to other solutions.

A Foreign Pension’s simplicity and ability to protect and preserve a client’s funds are
arguably superior to other options in the market. Equally, the ability to deal with the
seamless transfer of international wealth on the death of a Member without the
complexity of a foreign will or the administrative implications and costs associated with
foreign probate and foreign situs.

Foreign Pensions benefit from a flexible and unconstrained investment environment,
which permits true international investment across all major markets in a currency or
currencies of a client’s choosing.

Furthermore, Foreign Pensions do not suffer from a contractual requirement to
continually make contributions and clients can contribute in a manner that works for
them so that they can build a source of international wealth that meets their individual
requirements. In addition, benefits can be taken in a way that meets their needs,
irrespective of the country in which they live, with benefits paid anywhere in the world,
within reason.

In all of these points, it is the financial planning outcomes that are critical and yes, tax is
a consequence, but it should not form the basis of planning given that tax law is fluid.

Take care when promoting foreign services

When considering the use of foreign financial products, Financial Advisers and their
clients need to consider both regulation and legislation in the Republic and how this
pertains to the foreign provider. Simply put, Financial Advisers would be well placed
only working with foreign providers who are licenced and regulated in South Africa and
who meet the other requirements under South African law.

In short, any foreign entity looking to offer a financial service in South Africa and
promote their services via a South African FSP, is required to meet the obligations as set
out in the Financial Sector Regulation Act 9 of 2017 and the Financial Advisory and
Intermediary Services Act 37 of 2002.

This is important as it ensures your client has the relevant protections in place knowing
that the provider is subject to the laws of South Africa and accountable for the services
it delivers.

Where Advisers work with parties not regulated in South Africa, depending on their
licence, they could inadvertently find themselves contravening the law and place
themselves at significant risk, thanks to a negligent foreign product provider who has no
regard for what is right or wrong.

Key takeaways

We can confirm that Overseas Trust and Pension Limited was not the applicant in the
Binding Class Ruling and given that the applicant was the founder of the Foreign
Pension Trust as referred to in the Ruling, we can confirm that the Ruling does not
relate to one of our products.

Furthermore, the material nature of the Foreign Pension Trust, as set out in the Ruling,
differs significantly from our services and further confirms this point. As such, the Ruling
does not apply to us, or our products and it does not apply to Advisers or clients
utilising our products. This position has also been independently confirmed by legal
counsel.

However, Binding Class Ruling 080 serves as a reminder that any Adviser looking to use
a foreign product should get confirmation from the product provider that the product
itself has been developed specifically with South African law in mind. Where
appropriate, Advisers should seek a tax opinion for their clients which could extend to
an opinion issued under Section 223(3) of the Tax Administration Act, so their clients
benefit from the protections that the law is specifically designed to provide.

In closing, the words of the highly respected retired High Court Judge, Chair of the Davis
Tax Committee and consultant to SARS, Dennis Davis, summed up matters best when
he confirmed in a 2021 interview that no recommendations about taxing Offshore
Pensions have been made to SARS and that South Africans are free to use them,
provided the Pension Plan is genuine, as are the clients’ motivations for using one.