The upcoming changes to South African tax law that will effectively close the loophole that allowed South African emigrants to cash in their retirement savings early, will see the formal emigration system being replaced with a tax emigration process. Instead of being able to access retirement funds immediately after formalising their emigration with the South African Reserve Bank, South Africans will instead have to show that they have ceased to be a tax resident in the Republic for a minimum of three years before being able to touch their retirement funds.
Here’s what South Africans living abroad need to know ahead of the changes which come into effect on 01 March 2021.
What does tax emigration mean?
South Africa has a residence-based tax system. This means that South Africans who are considered residents will be taxed back home on their worldwide income (bar a few exclusions) and asset base while non-residents are only taxed on income with a South African source. Thus, tax emigration means informing SARS that your tax status has changed and that they should no longer tax you.
The Income Tax Act defines a resident for tax purposes and these subjective criteria are applied by the South African Revenue Service to determine whether you should be paying tax. Determining your tax residency involves looking at details like how much time is spent in South Africa, where your assets are held and where your family lives.
What are the reasons for tax emigration from South Africa?
- To change your status to non-resident and avoid paying expat tax on your worldwide income.
- To access your retirement savings before the age of 55.
Steps in tax emigration from South Africa
Here’s how to change your tax status to non-resident:
- The ordinarily resident test
The first route is somewhat subjective. Meeting the requirements of this test means that you will be considered a tax resident – if the home to which you return at the end of your travels is South Africa. If you can show that you have no intention of returning to South Africa because you wish to become a permanent resident elsewhere, this will prove to SARS that you do not meet the ordinarily resident test.
Read more about the ordinarily resident test and how it is applied.
- The physical presence test
The second route is the physical presence test, which is an objective examination of time spent on South African soil. It is applied only if you were not considered ordinarily resident in South Africa during the tax year under consideration.
In order to show that you do not intend to be a South African tax resident, it’s important that you pay careful attention to time restrictions. Exceeding these time limits could mean that you will be considered a tax resident, so you should not spend longer than:
- 91 days in aggregate in the tax year under consideration;
- 91 days in aggregate out of each year of the five tax years before the tax year under consideration; and
- 915 days in aggregate during the prior five tax years (which works out to an average of 183 days per year).
Failure to meet these requirements means that you will be considered a non-resident for tax purposes.
Read more about the physical presence test and how it is applied.
Will I have to pay Capital Gains Tax on my tax exit from South Africa?
Before making the decision to emigrate from South Africa for tax purposes, it’s important to note that ceasing to be a tax resident will trigger a deemed disposal of your worldwide assets for capital gains tax (CGT) purposes. This tax cost associated with becoming a non-resident could be material or immaterial:
- Material: where you own assets that trigger the deemed CGT provisions.
- Immaterial: where you do not own or did not own assets at the time when you ceased to be a South African tax resident.
Tax implications of emigrating from South Africa
- When you cease to be a tax resident, an exit charge is activated and payable to SARS in terms of which all your assets will be deemed to have been sold at market value on the day before you ceased tax residency.
- Aside from the fact that this exit charge does not extend to South African immovable property, all remaining South African and other worldwide assets will be deemed to have been sold.
Read more about Capital Gains Tax and tax emigration.
Can I still own property in South Africa after tax emigration?
The Capital Gains Tax liability is not triggered on South African based property when you exit the tax system. This is because the South African Revenue Service knows that they will get this money from you eventually – when you sell this property.
Furthermore there are no restrictions on non-resident ownership of property in South Africa, so there is nothing standing in the way of you investing in the property market and taking advantage of an exchange rate that works in your favour.
FinGlobal: tax emigration expertise at your disposal
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Take a look at our transparent fees, see what our clients have to say about us and then get in touch to discuss your tax needs today!