The Way It Was
Historically, the South African income tax regime was been based on territorial principles. There was never a capital gains tax. Until two years ago, income Tax was applied only to income arising in or remitted to South Africa, although there were considerable deeming provisions relating to overseas income deemed to have been remitted into South Africa. There has been an Estate Duty for many years, applicable on world-wide estate (Estate Duty Act 1955). Donations Tax similarly has been around for many years (Income Tax Act 1962). The statutory exemptions from such tax effectively meant that property outside South Africa acquired from a non-South African source was exempt.
Exchange Control required overseas earnings to be repatriated. Certificates of Title (e.g. Share certificates) in overseas companies or entities had to be deposited with an Authorised Depositary in South Africa for retention. The Exchange Control system was closely modelled on the old United Kingdom system, with which the older generation of British professionals, now at retirement age, will have been familiar. A Resident of South Africa was not permitted to have an overseas bank account without Exchange Control permission. Any securities in foreign companies must be lodged with an Authorised Depositary being a bank or approved institution in South Africa, acting as agent of the Reserve Bank.
The effect of the above is that it was extremely difficult to move funds out of South Africa legally. However, where assets derived from non-South African sources were held in an overseas trust, such assets were effectively outside the scope of South African tax or exchange control. Thus, immigrants into South Africa settled their assets into an offshore trust prior to arrival. South African capable of receiving inheritances or other capital sums from outside South Africa arranged for them to be received into offshore trusts.
Even though income from outside South Africa was not liable to South African tax unless actually remitted into South Africa, Exchange Control regulations required that such income should be remitted. The effect of Exchange Control was thus that it was difficult legally to avoid the obligation to remit income into South Africa, where it then became taxable. In consequence, there was widespread evasion of exchange control requirements where there were foreign sources of income, and such income was diverted into overseas offshore trusts.