Tax risks of large bank balances

A taxpayer was informed that they owed the SA Revenue Service more than R100,000 because of interest earned on local and offshore bank accounts.

How Interest Is Taxed

Interest earned on South African bank accounts becomes taxable when it exceeds the annual tax-free allowance available to an individual. The tax liability is based on the interest income above that exemption, with the applicable rate determined by the individual’s tax bracket.

For individuals in the highest tax bracket, taxable interest income can be taxed at 45%. A large bank balance may therefore create a tax obligation when the interest it generates exceeds the annual allowance, even if the funds remain in the account.

Different treatment applies to offshore interest earned by South African tax residents. That income does not qualify for the annual interest exemption, meaning the exemption available for interest from South African bank accounts cannot be used to reduce taxable offshore interest. South African tax residents must therefore account for offshore interest separately from interest earned locally.

Capital Gains Tax Comparison

Capital gains in South Africa are taxed at a maximum effective rate of 18%. South African tax residents also receive an annual capital gains exclusion of R50,000, reducing the gains that may be subject to tax in a tax year.

The exclusion applies to capital gains rather than the value of an asset or the amount held in an account. Any tax exposure is therefore considered under capital gains rules, subject to the R50,000 annual exclusion and the maximum effective rate of 18%.

Offshore assets can carry a separate risk when their owner dies. Depending on where an asset is situated, it may be subject to foreign estate taxes known as situs taxes. South African tax residents holding offshore assets may therefore face tax exposure outside South Africa upon death, in addition to the South African tax treatment of their assets.