The UK has Brexit, The USA has President Trump and South Africans have Expat tax 2020. These were hot topics over the past year and still is. South African ex-pats all over the globe are wondering how their income abroad will be taxed in the near future and how to avoid it.
With the new tax law effective from 1 March 2020 (hence Expat tax 2020 or Tax 2020), the exemption amount will change if you are a South African (SA) tax resident earning an employment income abroad.
Is Expat tax 2020 applicable to me?
“Expat tax 2020” is only applicable to SA tax residents earning an employment income abroad. These South African ex-pats will only qualify for exemption of R1 million if certain criteria have been met. It is of the utmost importance to highlight the fact that “Expat tax 2020” only applies to SA tax residents. Section 1 of the Income Tax Act provides the resident definition. Generally, you apply the ordinary residence test and/or the physical presence tests in conjunction with the applicable double tax agreement to determine if you are a tax resident of South Africa or not.
If you are not a SA tax resident, “Expat tax 2020” is not applicable to you and your employment income earned abroad will only be taxable in the country where you are a tax resident. That’s right, you will not be liable for Tax 2020 if you meet the requirements outlined out by the ordinary residence test and/or the physical presence test which can be found here.
I am still unsure, what else do I need to know?
The uncertainty rests with previous South African taxpayers who are not SA tax residents anymore. This group of individuals is scared that they will be taxed in South Africa on their employment income abroad. Some tax experts believe that formal emigration (also referred to as financial emigration) is the way out and that it is the only way out. They convince this group that the only way for them to become a non-resident for tax purposes is to file a formal emigration.
This is not true. Formal emigration is a process that you complete through the South African Reserve Bank (SARB) in which you apply to exit the Exchange Control system of South Africa in order to transfer your funds abroad. The main reason why South African ex-pats choose to complete formal emigration, is to withdraw a Retirement Annuity from South Africa in full or to transfer funds abroad if they do not have a valid RSA ID document.
Is formal emigration from South Africa the only solution to change my tax residency at SARS if I am not a tax resident?
The short answer is, No. Formal emigration is not a prerequisite for the South African Revenue Service (SARS) to classify you as a non-resident. Since 2001, it is possible to complete a tax exit at SARS without the obligation of completing a formal emigration. This is more cost-effective for ex-pats who are classified as tax non-residents and who wishes not to complete the formal emigration process. SARS issued an FAQ on 22 October 2019.
Let us look at Question 18 of the SARS document, which explicitly deals with the issue of tax residency and financial emigration:
How does financial emigration impact my tax residence?
Acquiring approval from the South African Reserve Bank to emigrate from a financial perspective is not connected to an individual’s tax residence. Financial emigration is merely one factor that may be taken into account to determine whether an individual broke his or her tax residence. An individual’s tax residence is not automatically broken when he or she financially emigrate. The deciding factor remains whether an individual ceased to be an ordinary resident in the Republic.
In conclusion, formal emigration from South Africa is not the solution. There are other means to exit the SARS tax system and to cease tax residency without completing formal (financial) emigration.
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