If you are a South African working and/or living abroad, it is prudent to be reminded of the imminent tax and exchange control changes that may affect you from next year.
Except for the so called “expat tax” which is effective from 1 March 2020, also note the other proposals under review, especially the withdrawal of retirement savings upon emigration.
Proposed changes of the tax and exchange control treatment of individuals
Following the amendment to the income tax treatment of South African expats who work offshore and receive remuneration outside the country, the South African government also proposed to remove the exchange control treatment for individuals, while strengthening the tax treatment.
The intention is to:
- Allow individuals who work abroad, with remaining South African economic/family interests, more flexibility, provided funds are legitimately sourced and the individual is in good standing with the South African Revenue Service.
- Subject Individuals who transfer more than R10 million offshore to a more stringent tax verification process. These transfers will also trigger an enhanced due diligence test that will include confirmation of tax status and the source of funds.
- Review the trigger for expat South Africans, living outside of South Africa on a permanent basis, to withdraw their retirement savings, including retirement annuity policies.
This process has started, and it is proposed that this will be phased in by 1 March 2021. Under the new proposed system, it is envisaged that South African resident individuals and emigrants will be treated the same for exchange control purposes. The concept of emigration, as currently recognised by the South African Reserve Bank (SARB), will be phased out, and it is proposed that this regime will be replaced by an enhanced South African Revenue Service (SARS) tax verification process. South African tax residency for individuals will continue to 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.
As a result of the exchange control announcements in the last Budget Speech that the concept of formal/ financial emigration will be phased out, it was proposed that the trigger for individuals to withdraw their retirement funds to be reviewed. The proposed Tax Law Amendments Bill, 2020 was published on 31 July 2020. The subject of the withdrawal of retirement funds was dealt with in this Bill, whereas it is proposed that the existing SARB exchange control process to be replaced by a SARS tax emigration process.
What this effectively means is that you would need to prove your foreign tax residency, cease your South African tax residency, and then obtain tax clearance from SARS to withdraw your retirement savings. The caveat however, at this point in time, is that you will be required to prove that you have been a tax resident outside South Africa for a period longer than 3 years. This requirement introduces more questions than answers as there are various pitfalls and double taxation agreements that need to be considered before this proposal can be adopted and enacted.
So, what do you do? Considering the uncertainty and ultimate outcome of the proposed Bill, it would probably be wise to consider your options now, the question then, should you withdraw, or should you wait?
Understanding how the proposed changes will affect you?
Should you be unsure about what you should do or have a specific question regarding your personal circumstances, please speak to one of our financial consultants who will provide you with expert advice and guidance – no fees and obligation free.