Understanding tax emigration for South Africans leaving or living abroad

If you belong to the group of South Africans that Finance Minister Enoch Godongwana has referred to as “mobile higher-income earners” and you’re contemplating leaving the country or are already part of the large pool of South Africa’s emigrants, it’s crucial to take into account the tax implications of emigration. The finance minister and the South African Receiver of Revenue are eager to retain as many South African residents as possible within their tax net. Therefore, they expanded tax laws in 2021 to include South African citizens’ worldwide income and assets. In an interview with BizNews, Sable International’s William Louw suggests that prospective and current emigrants carefully consider the concept of tax emigration, which involves altering their residency status. Louw outlined the necessary steps for tax emigration to BizNews and provided insights on assets that may trigger capital gains tax. He also highlights the rules for individuals who may wish to return to the country. – Linda van Tilburg

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Listen to the interview here

Excerpts from the interview

The difference between tax emigration and expat tax

As a South African tax resident, you pay tax on your worldwide income and asset base. But as a non-tax resident, you only pay taxes on South African-sourced income and assets. Tax immigration is telling SARS I have changed my tax status from being a South African tax resident to being a non-tax resident, so the taxing rights that you have, have changed. When you change your tax status or tax emigrate from South Africa, SARS loses taxing rights from your worldwide assets to your South African sourced assets. 

Expat tax is an exemption allowed to a South African tax resident who is working as an employee abroad. You have to be seen as a South African tax resident for your income worldwide to be brought in, and then you try to exempt it under the expat tax or the R1.25 million exemption.  

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Assets that may trigger capital gains tax if you tax emigrate

You need to look at that when you change your tax status or tax emigrate from South Africa, SARS loses taxing rights from your worldwide assets to your South African sourced assets. So, the assets that you’re not concerned about when you leave the country are South African property because it’ll always be subject to tax when it gets sold, retirement, annuities, pension and provident funds because they’ll be subject to tax when they are paid out according to laws of the time. Bank accounts are excluded, whether you’ve got rand, pound or the dollar, the core value of the currency doesn’t change no matter what the exchange rate does and personal assets are excluded.  

Any other asset that can trigger capital gain will be triggered when you tax emigrate. So, the main ones would be foreign property (if you own them), share portfolios in or out of South Africa, ownership of South African companies and the like. You need to look at your assets to see if they trigger a capital gain and the capital gain based on that scenario.

Trigger all tax events before you leave the country to avoid double tax

Firstly, about the timing, you need to be able to prove to SARS that you’ve moved your lifestyle. So, you can’t prove that straight off when you have left, so realistically, we would look at changing your tax status around March or April after you’ve left so that you can first build up the evidence that you’ve proved that you’ve tax emigrated, as well as the fact that you’ve lived through the first winter in the other jurisdiction, that you have lived there for a while and that you know that you’re happy to stay in the country. That you’re not planning to come back to South Africa in the near future before you tell SARS. So that’s the timing.  Regarding the asset base, you need to look at what will happen when the assets are deemed to be sold. So this is a deemed tax, not an actual tax. All DTAs or most DTAs refer to actual taxes to get tax credits, which means that if you have a deemed tax from a deemed sale of your assets, the tax is not an actual tax, which means it can’t be used as a tax credit by the other country. So, you can have a situation where you pay this exit tax, and then you sell the asset later, and that country, like the UK, for example, doesn’t allow the tax credits, which means you pay double tax. So, we would suggest to somebody planning to leave to see which assets can be sold and if I am willing to sell them and potentially buy new or equivalent assets once I’ve left the country. Trigger all the tax events while in South Africa so that you never have double taxation and have a clean base cost in the new country you’re going into. So you never have to worry about the double tax.

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Let sleeping tax men lie? – SARS could trigger overseas probe

If you left before October 2001, because that’s when capital gains tax started in South Africa, there was no real exit tax, which means that by definition, there would be no tax due if you left beforehand, and it’s a whole lot of administrative headache just to let SARS know that no tax is due. But there could be another reason why you would need to pay tax to emigrate. So, I have encountered scenarios where we will potentially delay the tax status change. This is more for somebody planning to cash their annuities in a few years or has South African property but not an active tax number. They’re planning to sell in the future or planning to inherit property and then sell, and they don’t have any tax affairs at this time, then they might only change their tax status in the future, i.e when they need to register for income tax and at that stage sort out the tax status change. 

If you look at this realistically, what’s the worst? The worst is this: If you emigrate and don’t tell SARS, SARS then levies penalties, they try to collect it from you. When you ignore them, they’ll approach the other tax office, in which case then you might be sitting with both tax offices going through your tax affairs for the last 20-odd years.

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What you should consider if you want to return to South Africa

You’ve got two things that you need to look at. One is what happens with my asset base, and the other is how the taxes on my income streams will be dealt with. Regarding the asset base, when you return to South Africa, the tax emigration tax place is reversed.

So basically, you’re deemed to buy all your assets at the time of returning, and that’s your base cost for capital gains tax going forward in South Africa. Any capital growth up to that point is lost from the South African tax system for South Africa, which currently doesn’t tax so it can be good from that perspective.

For the income streamside, you need to look at if you become a South African tax resident, your worldwide income is taxed again by South Africa. So, you need to report everything, including what you might earn from foreign sources and see how they will be taxed. You also need to be aware that exchange control and tax effects are two different things. How SARS will tax you is one way; how your cash flow has to happen between South Africa and another jurisdiction is different. So, while you are working abroad, South African citizens are allowed to keep their cash abroad. Whether they pay tax is another matter and has to do with the residency the taxing rights. But if you are in South Africa earning from abroad, the exchange control requirements require that you bring those funds into South Africa.

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