The unexpected ways your wallet suffers if you emigrate

*This content is brought to you by Brenthurst Wealth

By Charize Beukes*

With borders reopening again and international flights resuming, the topic of leaving South Africa is again a popular discussion point. While COVID isn’t yet completely done, it’s becoming easier to make more concrete plans if you’re thinking of leaving for greener pastures.

How green those pasture turn out to be is a matter of debate, and you’ll unfortunately only know that once you’ve taken up residence in your new home.

Which will be some relief after the considerable effort and expense to relocate. And don’t be fooled: emigration is an expensive business. Not only because of the logistics involved, but especially because SARS is eager to dig in its claws one last time.

This it does primarily through levying an ‘exit tax’, but also new legislation that locks your retirement savings up for three years after you’ve completed your financial emigration.

South Africa isn’t the only country to charge this tax when you change your tax residency, but the practice is far from common.

What triggers your exit tax?

You’re liable to pay this tax when you formally deregister as a South African taxpayer because you’ve emigrated and registered for tax in another country.

South Africa has a residence-based tax system, which means you’re taxed on any income you earn, no matter where you earned it. So, if you haven’t deregistered as a South African taxpayer, SARS might have dibs on what you’ve earned in your new country.

The exit tax, however, is presented as a form of a capital gains tax (CGT) that is levied on 40% of your personal net capital gain. For trusts, 80% of your net gain is taxable.

SARS reasons that when you cease your local tax residency, you’re deemed to have sold your worldly assets as a South African taxpayer to your non-local taxpayer self on the day that your tax residency ceases.

Assets excluded from the tax include South African fixed property held in your name, retirement interests held in pension, provident and retirement annuity funds, cash and personal use assets.

However, you’ll be taxed on foreign fixed property, shares, cryptocurrency, unit trusts and other similar investments and trusts, depending on how they’re set up and the assets they hold.

How much can you expect to pay?

Let’s look at a hypothetical example to see the impact of this tax on your net wealth.

If your net capital gain is R1,15 million, then R444,000 (40% of this amount, after taking into account the R40 000 annual exclusion applicable to individuals) would be liable to CGT in your personal capacity, while the 80% inclusion rate for Trusts means that you’ll be taxed on a sum of R920,000.

Assuming a personal tax rate of 41%, which is used to determine your CGT obligations, you’ll end up paying an exit tax of about R182,000 while the exit tax on Trust assets is around R414,000 on a CGT rate of 45%.

This seems a heavy price to pay for wanting to pursue your dreams.

Another spanner in the works

To add insult to injury, three consecutive years must pass from when you changed tax residency before you can draw your retirement savings as a lump sum. This new rule comes into effect from 1 March 2021 and could leave you cash-strapped if you were relying on the savings to cover relocation or living expenses.

You can unlock those savings when you can prove that you’ve been a tax resident of another country for more than three years and that you’ve physically been out of the country in this time.

This process could be further hampered if you failed to correctly inform SARS you were changing tax residency, and if you hadn’t submitted and paid your exit tax. So make sure all the right boxes are ticked to prevent further delays.

On the upside, your savings will continue to grow for the period that your funds are still locked in.

But beware! Government may have further plans to charge an exit tax on Retirement savings in future. The proposed amendment to the Tax Act was suspended in late 2021 due to the amendment possibly overriding existing tax treaties, however this may not be the last we hear of this new proposed tax. SARS and National Treasury indicated that they will consider further amendments in the 2022 legislation. Only time will tell what the amendments to the 2022 tax bills will be, but with expatriates leaving South Africa in droves, one can only imagine that SARS would like to get their hands on your hard-earned retirement savings one last time.

Whatever the case may be, until we have more clarity, the 3 year lock-in rule will still be applicable unless existing tax treaties can be renegotiated.

Leaving South Africa is not an easy decision by any means. You have many factors to weigh up, and the costs I’ve outlined here should definitely count heavily in your decision-making.

I find that, often, there’s no place like home. With and without its warts and faults. You can preserve your hard-earned savings by building a life in South Africa that suits your personal life goals. Rather let your money do the hard work by being deployed into offshore assets that offer you greater growth potential.

My colleague Rocco van Zyl recently wrote an article on how to Emigrate your investments, not your lifestyle.

  • Charize Beukes is an Assistant Financial Planner at Brenthurst Wealth. [email protected].

Brenthurst Wealth

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