Fear-mongering and expat tax: Here’s the real facts you need to know

JOHANNESBURG — Treasury’s bid to get expats to pay taxes to SARS has put many Saffers overseas into a flat panic. The news has become especially worrisome for those expats living in ‘tax-free’ parts of the world like the UAE. But according to Sable International independent financial planner, Niel Pretorius, there has been some fear-mongering around expat tax and if it comes into effect, a key factor for Saffers overseas will be their residence. Take a listen. – Gareth van Zyl

This podcast is brought to you by Sable International and I’ve got Niel Pretorius, an independent financial planner, who is on the line with me from London. Niel, thanks a lot for chatting to me today.

Yes, thanks Gareth, thanks for the time. It’s nice being back in London, though we miss South Africa and Cape Town in particular.

I’m sure, especially as the weather is starting to get much warmer down here.

Yes, I see there’s a bit of a heatwave going on there.

That does bring us to our topic of discussion, which is expat tax. There are some expats from your part of the world who tend to flock to warmer climates, such as Dubai and even South Africa. But “expat tax” comprises of two words that are scaring a lot of South African expats out there at the moment. Briefly, can you tell us what is happening when it comes to expat tax and SARS, and what does treasury want to change in particular?

Yes, the biggest change has been the proposed repeal of Section 10(1)(o)(ii) of the Income Tax Act, which in effect basically removes the foreign employment income exemption that we’ve had to date. What this boils down to is that treasury wants you to pay tax on your foreign earnings.

That, obviously, has scared South Africans all over. What I have found is there’s a bit of confusion among a lot of people. We deal with a lot of queries from people who have been outside the country for 10, 20 years, and they ask us: Is this going to affect me? In a nutshell, the answer is typically ‘No’ because the changes to the Income Tax Act can only affect you if you are a resident, or deemed to be a resident, in South Africa. So, that is, either you’re caught by the ordinary residence test or the physical presence test. Outside of that you don’t really have too much to worry about, if you don’t fall within those two categories.

Can you explain what the residency test is? I think that’s the first time I’ve ever heard that?

SARS looks at you in two forms basically. If I can start with the second one first — which is the physical presence test. That is a calculation of the amount of time you spend in South Africa. So typically you’ll be caught by that if you spend 91 days, in the current year, in South Africa, plus 91 days for each of the preceding five years, and a total of 915 days over those five years. If you are caught by the physical presence test you will be taxed as if you are resident in South Africa.

The other part of it is the ordinary residence test. Now, there is no set definition for that. SARS looks at where are your assets are based and where your family is based. It’s been defined as your ultimate home. That is, where do you return to after you stop wandering the globe?

Now, in that case you can still be deemed an ordinary resident in South Africa even though you’ve spent a number of years abroad. The question then also arises: Are you only a resident in South Africa? Or are you actually a dual resident? The latter is the case in a lot of these instances.

South African Revenue Service (SARS)

You might have been working in the UK or Dubai for the past 10 years. In which case, you’ll find you are a dual resident because you’re a tax resident in, let’s say the UK, but equally an ordinary resident in South Africa.

In this situation, you’ve got to go to the next step and see if there’s a double taxation agreement (DTA) in place and if so, where that agreement assigns residency to. The DTA ultimately gives exclusive residency to one of these two countries. You can’t be dual resident of two different countries and pay income taxes. Tax residency will be assigned exclusively in terms of a DTA.

Maybe you can unpack that. For example, for someone who’s been living in the UK for some time, what particularly do they need to tell SARS? Will they be expected to disclose anything to SARS?

Yes, let me give you a classic example. Just like myself and some of my colleagues, quite a few of us are South Africans. If you take myself, as you know, I spend half my time in the UK and half my time in South Africa. My family is still in South Africa. So, if I go and look at the double taxation agreement and you look at the tie breaker tests, the first thing they (SARS) look at is where is a permanent home available. If that’s only in South Africa, well you’re automatically going to get assigned residency there. If it’s in both countries then you look at the next drop down, which effectively is where is my centre of vital influence. So, where are my family, my assets… Where do I live? My social life and all of that comes into play and that can be assigned in various ways.

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With somebody like me, who spends my time up and down but whose family is back in South Africa, the DTA is going to assign residency to South Africa. Somebody, like some of my colleagues who live here on a more regular basis, have family here, have kids at school here — in that kind of scenario, it is quite clear that they’re residents in the UK, in which case the DTA would assign residency to the UK. In this case, as soon as that assignment happens, you become exclusively a resident for tax purposes of that jurisdiction. So, in effect, if that’s the UK then the change in the South African Income Tax Act is not going to affect you whatsoever.

So you wouldn’t be expected to pay anything over to SARS then? You wouldn’t be expected to pay any difference over, perhaps?

Nothing, you still pay tax on your South African assets. So, if you had property and you rented that out, then you will still pay taxes in South Africa, but nothing on the rest of your income.

If you completely pack up from South Africa. You sell everything – your home, your car, and you move to the UK, for example. You then basically reside almost full time in the UK. You live, work there, and you don’t travel back very much. You then basically, may not be touched by these new regulations that treasury is mulling?

Absolutely. In that scenario, you would fall under two categories. So, one, you would have moved your ordinary residence to the UK, in which case it wouldn’t apply. Secondly, in terms of the double taxation agreement again, if you look at where you are now it’s going to be assigned to the UK and you won’t be taxable in South Africa.

What about South Africans who are expats in Dubai? If they don’t have any assets in South Africa but they’re living in Dubai – let’s say that they’ve even maybe bought property there. Would they also escape SARS or would they still be expected to pay something over?

No. Provided they can show SARS that they can either became ordinary residents in the UAE or that they fall in the tiebreaker within the DTA – if that falls under the UAE then that’s not going to affect them whatsoever. I’ve dealt with a lot of queries on that basis. You have guys that have been living out there for 10 years. They’ve got their family with them, they’ve bought property and all that. Their intention is to be an ordinary resident in the UAE, and they’ve actually taken steps and they can evidence that intention. In which case, the changes in the income tax law do not affect their lives.

So, if somebody is basically residing in the UAE, they’re living in their own house there and even though they’re not paying income tax, they could then continue not paying income tax?

Absolutely. So, they can also look to treaty relief – it’s a bit of a rigmarole because they’re going to have to apply for a certificate of tax or residency each year. It’s the best option because there’s been a lack of clarity in terms of where to get this.

There is a website that you can go onto but I don’t have the link with me at the moment. Again, it’s the practical effort you have to go through. It costs you about R7,000 each time.

Do you think there’s been a lot of fear-mongering around expat tax?

Absolutely, I look at it just from our emigration business. Since this proposal was made in March, in the Budget Speech, queries that come through have just skyrocketed. In my case, I spend a bit of time and talk to people and understand what their situation is.

A lot of them are saying, “I just want to emigrate”. Take a step back, and if you fall outside of the ordinary residence definition, or are included in the DTA, that will put your residency in a different country, then there’s no need for financial emigration. In which case, you can rely on those two bases. If you really want to formally emigrate, it’s a personal choice at the end of the day, but it’s not always technically required.

There’s been a lot of talk about people having to properly emigrate to completely escape this tax, but you’re saying that you don’t have to do that.

No, but again, it’s a case by case basis. It’s based on your personal circumstances. It depends on where are you in life and if you are able to pin down and say, in terms of either the DTA or residence test, that you are resident in the UAE or the UK or whatever the case might be, and plan accordingly.

Why is treasury looking to make these changes now?

Interesting question. My simple answer would be that they’re looking for money wherever they can find it I suppose. They seem to think it’s a rich source to get taxes from. They did a study fairly recently on, effectively, compulsory registration of people leaving South Africa for longer than three months, in which they’ve unpacked some numbers. The number of professionals working outside of South Africa is quite high. I think they’re looking at this as a potential, nice source of income for the government.

How are these tax regulations going to compare to other countries? I know that America has something similar, but how do we compare to the US and the UK, for example, when it comes to expats and tax?

The US is probably the classic example of taxing their citizens wherever they reside in the world, but they do have certain exceptions. For the states, it’s just over the first $100,000 would be exempt from tax plus they would allow you some form of housing benefits allowance to add onto that. So, it’s not tax right off the base from R1 or $1 in that case. Whereas treasury has not indicated anything like that. I’ve yet to hear an exemption of $100,000 of income. You’re getting quite close to the 45% bracket there already but they have not made any concessions or noises to that effect.

Will that then make it quite unique – the fact that treasury is not looking at any concessions?

Yes, I think it’s quite draconian. Most of these people move to these countries to provide better lives for their families. A lot of them send money back home. If you’re going to start taxing these people it will kill the incentive to work in some of these countries. They are going to do one of two things: They’re either going to pack up and go home and become unemployed, or they are going to emigrate and the expats are going to become ex-South Africans.

Where is government currently with this regulation? I know that they’ve put together some drafted legislation, but do you know what the latest update on that is, because they would also get comments from the public, correct?

Correct. Public comments closed on 18 August. There were public hearings that were held in parliament last week. A number of presentations were made to parliament and, as far as I recall, we expect some formal response from government towards the end of this month, I think 19 September was the initial date mentioned, and we’ll see what comes back from that but; personally, I think they’re shooting a bit from the hip without having done too much research into this regarding the economic impact of these regulations. At the moment, it’s just a complete repeal.

Niel, there was also a Facebook group setup, almost like a petition, people were providing digital signatures to oppose this mooted regulation. Do you think that those voices will be heard and that they would in fact, derail this plan?

The voices have been heard. Government has picked up on this. I think that site was started by a namesake of mine and I think on government’s Facebook page there was something like 8000 objections to the change. That’s outside of the professional bodies that made comments in their own right. So, there’s a big opposition to this law.

That sounds like quite a big level of opposition, especially compared to the wealth tax which seemingly had a more muted response.

Yes, if you look at the number of guys that are working abroad, the average person in the UAE is probably spending 20% of his income just on accommodation. If you start adding in another 45% tax in South Africa. You are probably going to have to pay it and then reclaim it through your tax assessments on that. There isn’t a mechanism that seems to be able to work on this and I don’t think government can execute it in its current form.

Let’s say that government does manage to push this through. If I’m an expat, what should I be doing now to prepare for this?

The easiest way is just to be able to get outside of the loop of the impact of this by getting a DTA residency with another country. If you haven’t got it outside of that, if you’re not an ordinary resident somewhere else, and not complying with a DTA, you’re going to have very little chance to save it. Then it’s a question of planning, in terms of what you’re going to be doing going forward. Most of the people I see seem to say you know what, if I’m caught and I have to pay 45% tax, there’s no ways I can stay where I am.

So, it’s really just about trying to get ready for what could be coming your way?

Absolutely, and I guess we will only see the answer once government gives their response to the public comments and the public hearings that have been held recently.

You said that at Sable International, you’ve been getting a lot of queries about this as well. Have you noticed those queries spiking in recent days and weeks?

Absolutely, and not just in days and weeks. Since the first proposal that came in March, where they wanted taxation from the people working in non-tax countries, which then evolved into the proposal, which was just a blanket repeal. We saw that initial rise in March 2017 from our normal queries. When the repeal came through, that has virtually doubled again. There’s a lot of worried people out there, make no mistake.

Yes, and Niel, you guys at Sable International can help people through this process as well.

Yes, on the one side, I do sit on the emigration side, looking at people’s’ circumstances and determining whether they are resident, either ordinarily or in terms of the DTA, and whether they should emigrate or not. If you don’t emigrate and you leave retirement funds in South Africa, you create a big problem for yourself down the line. You’re going to be relying on retirement funds in Rands when you’re going to be living in a country where you’re spending Pounds. So, you’re creating this liability mismatch.

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So, when you look at that on an individual basis and decide: Is this the right course of action or not? This is the case, even if it isn’t and the guy says he’s going back to South Africa at some point. The second part then becomes important. To say, you need to structure your international investments in such a way that when you do go back you are actually tax-efficient. Simply holding stocks and shares in your individual name is not going to do you any favours down the line. Sending money back home to stick it into your RA, it’s not doing yourself any favours either.

So, it’s those various matters that come into play and every individual again is different. They’ve all got different outcomes in mind, they’ve all got different plans, on what they want to do and where they want to be. So, it’s literally on a case-by-case basis, you’re going to have to sit down and figure out if this is where you’re going to end up and this is how you should plan accordingly and utilise the best tax-efficient structures that you can.

Expats shouldn’t then just be worrying about the tax element, but they should be looking at their overall investment strategy as well and how that ties into tax, ultimately?

Absolutely so, while they’re in the UAE they might not be paying tax but; ultimately, when they come back to South Africa, whatever they’ve built up could be subject to taxation. And if you don’t plan properly before coming back, you’re going to have a problem going down the line. You have income tax, capital gains tax, estate duty, executors fees, and you’re going to bring all that into play to make sure that you’re in the best position that you can be in.

Regardless of whatever changes happen with the regulation, expats should be looking at this issue a lot more seriously anyway?

Absolutely, you’ve got to plan for life after your country of current residence. If you’re going to move in the future, make sure you plan beforehand.

Niel, it’s been an absolute pleasure talking to you and very interesting to find out a lot more about this topic. Thanks for having a chat with me today.

No, thank you and only a pleasure. I look forward to talking to you again, Gareth.

Thanks Niel, this podcast was brought to you by Sable International.