Expat tax has received a lot of media coverage of late, with some polarised views from professionals even within the same industry.
This has led to a lack of clarity and a lot of confusion. South Africans living overseas are concerned that they are facing an ever-growing tax liability in South Africa. Some tax practitioners and financial advisors are advising that financial emigration is a requirement in order to change your tax residence status to non-resident. We disagree with that view; here’s why.
The Income Tax Act: What’s changing?
In 2017, it was announced that the Income Tax Act will be amended by removing the foreign employment income exemption. Currently, to qualify for the exemption, South African expats must be outside of the country for more than 183 days in total and for a continuous period of 60 days within a consecutive 12-month period.
Once the new law comes into effect on 1 March 2020 this exemption goes away. South African tax residents abroad will be required to pay tax of up to 45% of their foreign income where it exceeds the R1 million threshold.
This change may not affect all South African expats; here’s why
South Africa has a residence-based tax system. This means that you will only be affected if you are a resident or deemed to be a resident in South Africa. The South African Revenue Service (SARS) determines your residency status through the ordinary residence test or the physical presence test.
The ordinary residence test
You can still be regarded as being resident in South Africa regardless of the number of years you’ve spent outside of the country. This is because SARS determines your residency by where your assets and family are based as well as the location of your permanent home.
In some circumstances, dual residency is also a factor. If, for example, you’ve been working in Dubai for the past 10 years, you could find that you are a dual resident because you are a tax resident in both the UAE and in South Africa. In this situation you would need to check if there’s a double taxation agreement (DTA) in place and where that agreement assigns your residency to.
To claim relief of a DTA, you would have to prove you meet the criteria of its definitions. You will also need to obtain a certificate of tax residency from the overseas country you’re based in.
The physical presence test
This is a calculation of the actual amount of time you physically spend in South Africa. You’ll be considered a resident if you spend:
- 91 days in South Africa in the current year of assessment
- 91 days or more in each of the preceding five years of assessment
- 915 days in total during those five preceding years of assessment
What is financial emigration?
Financial emigration is an exchange control matter. It involves making a formal application with the South African Reserve Bank (SARB) to become a non-resident of South Africa.
Once your application has been approved, an authorised dealer will take control of your assets in South Africa. Your bank account will be closed and any cash proceeds of any of your assets will be paid into a designated “blocked” bank account. This account is used solely to transfer your funds overseas.
There is no need for you to liquidate any of your assets in South Africa when you financially emigrate. You can liquidate these assets as and when you wish and transfer the funds abroad through your blocked account.
Once you’ve undergone the financial emigration process, your status with SARB changes from a permanent resident, or resident living temporarily abroad, to a non-resident of South Africa for exchange control purposes. Financial emigration does not have any implications for your South African citizenship. You will always legally be a South African and you can return to South Africa to live and work whenever you wish.
Should I financially emigrate because of the Income Tax Act?
We’ve seen a lot of misleading information suggesting that you need to financially emigrate to escape the expat tax. This is not the case for everyone. When you decide to formally emigrate from South Africa it needs to be based on whether it’s the best option for your own personal circumstances. A qualified and experienced financial emigration specialist would be able to help you make the right decision for your financial future.
It’s important to first assess your tax status. Falling outside of the ordinary residence definition, or having a DTA in place, will make you a tax resident of a different country. This means that there’s no need for you to financially emigrate.
There certainly are some great benefits to financial emigration. If you choose to do so, you can access and transfer the following out of South Africa:
- Proceeds from your South African retirement annuities before the age of 55
- Future inheritance funds
- Passive income from rentals, dividends, directors’ fees or a salary
- Proceeds from a third-party life policy
Should you have no intention to return to South Africa, financial emigration would tidy up your financial affairs with SARB and SARS. If you have no assets in South Africa and have been out of the country for longer than five years, you can financially emigrate without needing to obtain a tax clearance certificate.
All South Africans have an annual R1 million single discretionary allowance and R10 million foreign investment allowance (which does require SARS tax clearance). Both can be used for foreign investment and asset transfer as well as to claim your South African inheritance without having to financially emigrate. However, you will have to financially emigrate if you want to access your retirement annuity before it matures.
What about Capital Gains Tax (CGT)?
Financial emigration triggers a once-off capital gain liability on certain assets (in South Africa and abroad) that are “deemed” to have been disposed of. The CGT will depend on the size of the gain as well as the nature of the assets. It is possible to “backdate” the financial emigration process to avoid having to pay CGT on foreign assets you obtained after you left South Africa.
Get advice before you make your decision
The process of financial emigration is complex and each situation is unique, so it’s always a good idea to get in touch with a South African financial emigration specialist. They can carefully consider your personal circumstances and advise you on the best course of action.