Budget 2020: South African expat tax exemption increase and no more financial emigration

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National Treasury has announced two important changes for South Africans living overseas. Tim Powell, Forex Director at Sable International, breaks down these changes and how they are expected to impact expats.

In the budget speech on Wednesday, 26 February 2020, National Treasury announced changes to exchange control which could affect South Africans living overseas, particularly around the need to financially emigrate or not.

The key change for expats is that financial emigration through the South African Reserve Bank (SARB) is to be phased out from next year (March 2021), and the tax exemption on foreign remuneration you earn as a South African resident will increase from R1m to R1.25m on 1 March this year.

There is no clarity on the exact implications relating to the abolishing of financial emigration, although we expect this to be made clearer in the coming months. Our expectation is that this may make it easier for South Africans living overseas to access pension and retirement annuity funds in South Africa without having to endure the cumbersome financial emigration process.

The requirement to have a bank account in South Africa, be tax compliant, prove source of funds and encash the respective policies and investments before transferring these funds overseas will  probably remain in place. This is where Sable International will still be of great assistance to clients.

What does appear to be true is that after all the hype and conflicting articles published this year about the topic of expat tax, with some companies and advisors suggesting that financial emigration is necessary in order to become non-tax resident in SA, this announcement confirms it was not necessary for expats living overseas to financially emigrate to make themselves non-tax resident in South Africa.

Extracts from the budget speech and subsequent notes taken from the National Treasury website:

Flexibility for expats working abroad

“Following reforms to the income tax treatment of South African tax residents who receive remuneration outside the country, government proposes to remove the exchange control treatment for individuals, while strengthening the tax treatment. The intention is to allow individuals who work abroad more flexibility, provided funds are legitimately sourced and the individual is in good standing with the South African Revenue Service. Individuals who transfer more than R10 million offshore will be subjected to a more stringent verification process. Such transfers will also trigger a risk management test that will include certification of tax status and source of funds, and assurance that the individual complies with anti-money laundering and countering terror financing requirements prescribed in the Financial Intelligence Centre Act (2001). This will be phased in by 1 March 2021.”

Tim Powell’s (TP) comments:

The details of this change will probably only be revealed in coming months, but it does appear that government is trying to deter people from financially emigrating and ultimately cutting ties with South Africa.

The R10 million allowance remains in place – no changes there. The SARB make reference to amounts greater than R10m being allowed with a “more stringent verification process” – currently clients can apply for amounts in excess of R10m and the tax clearance application is already more stringent, as are the reporting requirements to the SARB on an annual basis. We will have to wait and see what this “more stringent process” entails.

Phasing out financial emigration

“Under the new system, natural person emigrants and natural person residents will be treated identically. Additional restrictions on emigrants – such as the restrictions on emigrants being allowed to invest, and the requirement to only operate blocked accounts, have bank accounts and borrow in South Africa – have been repealed. The concept of emigration as recognised by the Reserve Bank will be phased out, to be replaced by a verification process based on the amendments above. Tax residency for individuals will continue to be determined by the ordinarily resident and physically presence tests as set out in the Income Tax Act (1962). Under existing international standards, South Africa participates in the automatic sharing of information between tax authorities on individual’s financial accounts and investments. These cooperative practices will remain in place to ensure that South African Tax residents who have offshore income and investments pay the appropriate level of tax.”

TP:  The key word is “repealed” i.e abolished. Once again, there are no details as to the exact implications of these changes, for example, what if you’ve lost your green bar coded South African ID, or you left South Africa before they were issued in 1988 (currently it is a requirement to have this document to make use of the investment allowances)?

Maybe the SARB will allow funds, retirement annuities, pensions and inheritances to be paid overseas (net of any taxes due to South Africa), provided you are tax compliant, you can prove source of funds (e.g. a redemption statement in your name) and you can prove you have residence overseas.

They also make mention of common reporting standards (CRS). South Africans with undisclosed offshore investments and bank accounts beware.

Withdrawing retirement funds upon emigration

“Individuals are currently able to withdraw funds from their pension preservation fund, provident preservation fund and retirement annuity fund upon emigrating for exchange control purposes through the Reserve Bank. As a result of the exchange control announcements in Annexure E, the concept of emigration as recognised by the Reserve Bank will be phased out. It is proposed that the trigger for individuals to withdraw these funds be reviewed. Any resulting amendments will come into effect on 1 March 2021.”

TP: I suspect this means that you must still financially emigrate if you want to encash your retirement annuity (RA) between now and 1 March 2021. There is not much clarity for now – hopefully we will receive more information behind the intentions and required process in the coming months, especially relating to clients with RAs and inheritances from SA that they wish to transfer overseas.

We will keep you posted when we know more about the exact implications of these announcements.

We can help transfer your funds, inheritances and retirement annuities overseas. Contact our forex brokers and financial emigration experts by emailing [email protected] or calling +27 (0) 21 657 2153.