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By Tim Powell*
South African expats will have to face a changing tax structure in March 2020, which may affect their foreign income. This has forced many to think about and consider their tax residency status. We often see some confusion around the difference between financial emigration and becoming a non-resident for tax purposes. Many expats assume that either one, both or neither options may apply to them. It’s important that you understand what each process means before making any decisions regarding your tax status. We take a look at these in detail below to help you find the best option for your circumstances.
Becoming a non-resident for tax purposes
South Africa has a residence-based tax system, which means that residents are taxed on their worldwide income, regardless of where that income was earned. So, even if you’ve worked overseas for several years, if your tax residency is assigned to South Africa, you are required to declare your foreign earnings to the South African Revenue Service (SARS) and pay income tax. If your tax residency is assigned overseas, you are declared a non-resident and only income that is sourced in South Africa will be taxed by SARS.
How to determine your tax residency status
Your tax residency status is determined by SARS by way of two tests. These are the ordinarily resident test and the physical presence test. If you meet the requirements of these tests, you will be classified as a South African resident for tax purposes.
The ordinarily resident test looks at the location of your permanent home as well as where your assets and family are based. If these all point to South Africa, you will then be deemed a South African tax resident, regardless of the amount of years you’ve spent overseas.
The physical presence test calculates the amount of time you spend in South Africa. To pass this test and be deemed a resident for tax purposes, you need to be present in South Africa for:
- 91 days or more in the 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
If you fail to meet any one of these requirements, you will not be deemed as physically present in South Africa. However, you will still be required to pay tax on your South African assets, such as property that you rent out.
What it means to financially emigrate from South Africa
Financial emigration is the process of making a formal application with the South African Reserve Bank (SARB) to become a non-resident of South Africa. Once you’ve undergone this process, your status with the SARB changes from a permanent resident, or resident living temporarily abroad, to a non-resident of South Africa for exchange control purposes.
This process is simply an exchange control matter and will not affect 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.
Once you have financially emigrated, the SARB will change your residency status from resident to non-resident. Your bank will then open a blocked Rand account in which all your South African assets will be kept before being transferred overseas.
Financial emigration is not a simple process. The complexity of your application will differ depending on your circumstances. You don’t need to be present in South Africa to begin the process and it can be done from your home abroad.
Once the process is complete, 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 without being subjected to the South African resident exchange control
- Passive income from rental, dividends, director’s fees or a salary
- Proceeds from a third-party life policy
Financial emigration is not required to transfer proceeds of other assets such as bank accounts, discretionary funds, living annuities, pensions and provident funds, proceeds from sale of property and life insurance policies. These funds can be transferred using your R1 million and R10 million foreign investment allowances.
However, the initial and ongoing tax treatment may differ significantly between different assets. Therefore, it’s vitally important that you obtain the correct advice before making any decisions or applications regarding your assets and tax affairs.
Taxes on your South African-based income
Financial emigration does not exempt you from taxation in South Africa. You still need to pay tax on any South African-sourced income. These could include interest on capital invested in a local bank or income from property rental.
Who should consider financial emigration?
Financial emigration is not necessary for everyone. Whether it’s right for you will depend on what kind of retirement savings and assets you hold. However, if you want to access your retirement annuity, then financial emigration is the only option.
While current tax law does allow expats to access their retirement policies, that could change in the future. If you have decided that you will not be returning to South Africa on a permanent basis and want to ensure that all your tax affairs are in order before there are any other legislation changes, you may want to consider taking this route.
Where to start
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.
There are potential tax implications when financially emigrating, as well as opportunities to implement tax-efficient plans. For example, financial emigration can trigger a capital gain event. Seeking the advice of someone who has cross-border financial and tax planning experience will ensure that you make the right decisions.
- Tim Powell is a financial emigration expert. Email [email protected] for more information.