With impending changes to the Income Tax Act for South Africans living and working abroad (#ExpatTax2020), many are considering their options in the face of being taxed up to 45% on their worldwide income, after the first R1.25 million exemption. If you’re a South African currently working overseas and you’ve heard that you can avoid paying tax on your worldwide income by emigrating financially, you need to know that this is unfortunately untrue. Financial emigration is not a process to be undertaken lightly and should only be done once all the tax and exchange control implications have been properly considered, such as Capital Gains Tax (CGT).
Let’s take a look at what you need to know about financial emigration, Capital Gains Tax and how it applies to residents and non-residents for tax purposes in South Africa.
Financial emigration and capital gains tax guide
Financial emigration = formal emigration + tax emigration
What is formal emigration?
It’s the process of getting the South African Reserve Bank (SARB) to approve the change in your status from “resident” to “non-resident” for exchange control purposes. Formal emigration does not absolve you of your tax liability, nor does it affect your citizenship.
What is tax emigration?
It’s the process of notifying the South African Revenue Services (SARS) that you are ceasing your South African tax residency. This event triggers an “exit tax”, which is essentially capital gains tax (CGT), that needs to be calculated on the day that you cease your South African tax residency.
When should I consider financial emigration?
Financial emigration isn’t necessary in most cases, where South Africans living abroad can make use of their annual discretionary and foreign investment allowances to move funds from South Africa abroad. Both avenues are useful for foreign investment and asset transfer, without the need for financial emigration.
However, financial emigration does open up certain possibilities, in respect of accessing and transferring certain financial assets out of the country, including retirement annuities, future inheritances, and passive income. Once you have completed the process of financial emigration, you’ll have a much easier time getting abroad:
- Proceeds from South African retirement annuities before 55.
- Proceeds from future South African-sourced inheritances.
- Passive income such as rent, dividends, directors’ fees or salaries.
- Proceeds from a third-party life policy.
But wait. There are drawbacks to financial emigration, so be prepared.
Recent media reports seem to lean toward pushing South Africans abroad to record their financial emigration in order to avoid the expat tax, without pointing out that the process of financial emigration can be complicated and costly if undertaken for the wrong reasons.
With the recordal of your financial emigration, you are deemed to have disposed of all your South African assets, which means that capital gains tax applies.
Capital Gains Tax South Africa: financial emigration and SARS
Saffas are often shocked to discover that financial emigration isn’t the clean-cut break they were after when they’re hit with “exit charges” in the form of Capital Gains Tax. Why is this? The taxman makes the most of this final opportunity for tax on your assets when your status changes to “non-resident”, and as it stands, 40% of the gain is included in your income and taxed at your marginal tax rate. This rule also has another purpose, in that it effectively deters high net wealth individuals with a portfolio of illiquid assets from financially emigrating.
Immovable property (including your home and/or commercial property) is not included in this CGT liability, as the South African Revenue Service is confident they’ll get their cut of these properties on the withholdings tax you’re liable to pay on sale as a non-resident. If you are considering financial emigration and you’re doing it for the right reasons, but the only thing stopping you is the issue of capital gains tax upon becoming a non-resident, bear in mind that you’re going to have to pay it at some point, and it’s entirely unavoidable, because capital gains tax applies when you pass away and you’re deemed to have sold all of your assets and investments.
How does this CGT liability work?
When South African resident taxpayers become non-resident for tax purposes (in other words don’t meet the ordinarily resident or physical presence tests) they may become liable to pay capital gains tax. Where a person is no longer a tax resident, the Income Tax Act says that you are deemed to have disposed of all your assets the day before you ceased being a tax resident. This means the situation is dealt with as if you’d disposed of all those assets at market value on that day and they were then bought again at market value, which is then new base cost when the asset is sold in the future.
Confused? Don’t be. What’s important to remember is that whether or not the asset was sold or not is not an issue. A deemed sale for the purposes of capital gains tax calculation is assumed on the date of the day before emigration. As mentioned above, the only exception to this rule is immovable property.
FinGlobal: Financial emigration and expat tax specialists
Much like medical conditions, it’s never a good idea to self-diagnose. Speak to a financial emigration expert who can advise you on the best way forward with regards to your tax planning and cross-border financial requirements as a South African living and working abroad.
From assistance with determining your tax residency to tax advice on Double Taxation Agreements, tax refunds and everything else SARS related – we can help you every step of the way. If you do happen to decide that financial emigration is the way forward for you, because you’re interested in retirement annuity encashment, we’ve got all those needs covered, too.