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Many South Africans who have relocated abroad, or are thinking of doing so, are concerned about the change to the Income Tax Act in March 2020. There has been a lot of conflicting information being shared by tax practitioners and financial advisors regarding how expats will be affected by the change. It is true that some people need to financially emigrate, but others do not. We unpack the process, clear up common misconceptions and explain the benefits of becoming a non-resident.
Emigration vs. financial emigration
Emigration and financial emigration are very different processes. Emigration is the act of physically relocating from one country to another short-term or a long-term.
Financial emigration is the process of changing your status with the South African Reserve Bank (SARB), for exchange control purposes, from resident to non-resident. You may choose to financially emigrate from the moment you move abroad, or retrospectively once you have settled permanently overseas.
Financial emigration does not affect your citizenship status. The only thing that affects your status would be if you apply for citizenship in another country, in which case you would need to apply for dual citizenship.
Why are South African expats worried about the new Income Tax Act?
Currently, South African expats receive a tax exemption on their foreign income if they are outside 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 will be removed. This means that South African tax residents abroad will be required to pay tax on up to 45% of their foreign income where it exceeds the R1 million threshold.
Not all South Africans will be affected by the new tax law; here’s why
South Africa has a residence-based system of taxation. This means that you will only be affected by the new Income Tax Act if you are a resident or deemed to be a resident in South Africa.
The South African Revenue Service (SARS) uses two tests to determine your residency status. These are the ordinary residence test and the physical presence test.
To determine whether you are a resident in South Africa, these tests take into consideration where your assets and family are based and the amount of time you spend in South Africa. This means that some South Africans who have been living and working abroad may already be regarded as non-South African residents for tax purposes.
Dual residency is also a factor
If, for example, you’ve been working abroad for the past 10 years, you could be a dual resident because you are a tax resident your current home country and in South Africa. In this situation, you would need to find out if there’s a double taxation agreement (DTA) in place and where that agreement assigns your residency to.
Who needs to financially emigrate?
Many tax practitioners and financial advisors have been advocating that in order to escape the expat tax, you need to financially emigrate. This is not the case for everyone. Deciding to formally emigrate from South Africa needs to be based on whether it’s the best option for your own personal circumstances.
You should first assess your tax status. Falling outside 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.
All South Africans have the annual R1 million single discretionary allowance and R10 million foreign investment allowance (which requires SARS tax clearance). Both can be used for foreign investment and asset transfer without having to financially emigrate. If your intention is to access your retirement annuity, then you will need to financially emigrate.
Beware the Capital Gains Tax
Ceasing to be a South African tax resident also 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 avoid having to pay CGT on foreign assets you obtained after you left South Africa. This is done by backdating the financial emigration process to when you left the country.
Why should you consider financial emigration?
Financial emigration allows you to access and transfer financial assets out of the country. These include retirement annuities, future inheritances and passive income. These assets can then be transferred offshore to a destination of your choice. 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 retirement age
- Future inheritance funds
- Passive income from rentals, dividends, directors’ fees or a salary
- Proceeds from a third-party life policy
How to start the process of financial emigration
Undergoing the process of financial emigration is complex. It’s always a good idea to speak to a South African financial emigration specialist who can carefully consider your personal circumstances and advise you on the best course of action. Take our free financial emigration assessment to help determine if it’s the right option for you.
To find out more about financial emigration or to discuss your options, get in touch with our financial emigration specialists on +27 (0) 21 657 2133 or email us at [email protected].
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