Should expats cash in their South African retirement funds before 1 March 2021?

South Africans living and working abroad should take note of upcoming tax and exchange control amendments that could potentially affect tax affairs and finances from next year. In case you hadn’t already heard, the South African government is in the process of overhauling the foreign exchange control system to replace it with a shiny new capital flow management system in which all foreign currency transactions will be permissible, with the exception of a list of risk-based capital flow measures. One of the consequences of the new capital flow management system is a change in how individuals are treated, which will require the phasing out of the exchange control process of financial emigration.

What does this mean for you? It means after 1 March 2021 that financial emigration will no longer be available as a means to cash in your retirement annuity before the age of 55. Let’s take a look at the proposed changes and their likely impact on South African expats.

 

How will the exchange control and tax treatment of individuals change after 1 March 2021?

According to the Draft Taxation Laws Amendment Bill 2020, South African expats will be treated differently for the purposes of income tax, where they work offshore and receive employment remuneration outside the Republic. Here, the government has proposed that exchange control treatment for individuals be scrapped, beefing up on tax treatment measures instead.

 

What is the point behind the changes proposed by the Draft Taxation Laws Amendment Bill 2020?

The intention of this legislative amendment is to:

• Give South African expats more flexibility: by allowing individuals who work abroad (with remaining South African economic/family interests) more administrative leeway, as long as their funds are legitimately sourced and the individual is in good standing with the South African Revenue Service (SARS).
• Strengthen tax verification: Where individuals wish to transfer more than R10 million offshore, they will be subject to a more stringent tax verification process, and large transactions will trigger an enhanced due diligence test that will extend to tax status confirmation and require the verification of fund source.
• Review the trigger for retirement annuity withdrawal: for expats living outside of South Africa permanently to use financial emigration as a golden ticket to cashing in retirement savings.

 

This process is currently underway, and it has been noted that the new capital flow management system and its new changes will be in play by 1 March 2021.

• In terms of this new system the South African Reserve Bank (SARB) will treat South African resident individuals and emigrants the same for exchange control purposes.
• This will require the concept of financial emigration to be phased out, which will be replaced by an intensive SARS tax verification process.
• Individual South African tax residency will still be determined by the ordinarily resident and physical presence tests as set out in the South African Income Tax Act of 1962.

 

Withdrawing retirement funds from South Africa upon emigration

Individuals are currently able to withdraw the full capital value from their Retirement annuities, as well as the remaining balance in their pension/ provident preservation fund (i.e. the balance after a previous once-off withdrawal), upon the successful completion of their formal / financial emigration, for exchange control purposes, through the SARB.In response to the exchange control announcements that came in the latest Budget Speech that the concept of financial/formal emigration will be phased out, it was suggested that the individual trigger for retirement fund withdrawal would need to be relooked.

The proposed Tax Law Amendments Bill deals with the subject of the withdrawal of retirement funds and suggests that the existing SARB exchange control process of financial emigration should be replaced by a SARS tax emigration process.

• This means you will need to prove your foreign tax residency, cease your South African tax residency and then apply for and obtain SARS clearance in order to cash in your retirement savings if you’re living abroad.
• There’s a catch though. Once this legislation is effective, you will be required to prove that you have been a tax resident outside of the Republic for longer than three years.
• This requirement brings with it more questions than answers, and there are a lot of complicating factors, including double taxation agreements that need to be properly considered before this proposed amendment can be passed into law.

So, what do you do now? What must happen if you’re a South African living and working abroad with no intention of returning? Should you complete the process of financial emigration while you still can, or should you wait and see what the outcome is before you make a decision? Should you cash in your retirement annuity now, or wait?

Realistically speaking, there’s still a lot of uncertainty around the implications of these amendments. It’s worthwhile acting now while there is still clarity on the matter – bearing in mind that (as it stands) if you wait until after 1 March 2021, you’ll need to be in a position where you can prove your foreign tax residency, in addition to being able to show that you stopped being a South African tax resident more than three years ago. For South Africans that have relocated recently, this will mean having to wait almost three years in certain cases before you can apply to withdraw your retirement savings. It becomes a simple matter of asking yourself: can you afford to wait it out?

 

FinGlobal can help you understand how these changes affect you

If you’re having a hard time deciding whether financial emigration is the right step for you, we’re here to help. If you’re unsure about your next move, or you have a specific question about your personal circumstances, one of our financial consultants is ready to provide you with expert advice and guidance – no fees, no obligation.