In its 2021 national budget Treasury announced rule changes that would impact the process of formal emigration, and these rules are now in effect as of 01 March 2021. With these tax law amendments, South African exchange control residents will no longer need to formally apply to the South African Reserve Bank (SARB) for approval of emigration, because the process of formal emigration was phased out.
Let’s take a look at what we know about emigrants and their finances, moving forward.
What has changed? Formal emigration will no longer be required
While the formal emigration process has been canned, this does not give South African emigrants the freedom to move money offshore at will. Remittance of funds on emigration will still be subject to a tax verification process which will include a risk management test in some cases.
How can South African emigrants move their money abroad in 2021?
An authorised dealer will only be able to move an emigrant’s funds overseas if it has been furnished with a Tax Compliance Status (TCS) issued by the South African Revenue Services (SARS). This means that South Africans leaving the country from now on will be required to complete a SARS TCR01 ‘Emigration’ application form to receive a TCS, which serves as confirmation that the individual has ceased to be a resident for tax purposes.
A TCS will only be issued in respect of tax compliant taxpayers of 18 years or older.
Previously, South Africans could formalise their non-resident status for both tax and exchange control purposes, in order to move their funds abroad. While there has not been any public consultation on the topic, nor have we seen any draft Regulations on what the new process will look like, SARB has shared some insight with banks, in their capacity as authorised dealers, on what the new regime will entail.
What are the new rules?
As with everything in life, change brings with it both pros and cons. On the positive end of the scale, we’re getting rid of outdated legislation and exchange control methods. On the other hand, the process will have more of a tax residency focus moving forward which comes with a potentially onerous burden of proving non-resident status. Furthermore, emigrants will no longer be able to cash in their retirement savings immediately after having their status changed to non-resident, and will be required to show that they have maintained non-resident tax status for a period of three years or longer.
The following requirements are being removed from the formal emigration process:
- SARB MP336(b) form and application;
- Requirement for an authorised dealer to attest the application;
- Requirement of SARB approval before conclusion of the application; and
- No longer will primitive restrictions be applied to the emigrant’s bank account.
The new tax emigration process will include:
- A shifted focus to tax residency in terms of the South African tax residency tests, as applied by SARS.
- An application for the Emigration Tax Clearance Certificate with supporting documents to prove non-resident status.
- An “exit tax” calculation on worldwide assets, in terms of section 9H of the Income Tax Act.
- A stringent tax audit by SARS auditors, with support from the SARS Foreign Employment team.
- Approval by SARS which must be obtained before an bank (authorised dealer) may expatriate any funds for emigration.
What is tax residency in South Africa?
Tax residency is used to determine where your tax obligation lies. Tax residency in South Africa is determined by a two-fold test – the ‘physical presence’ test and the ‘ordinarily resident’ test.
Important things to bear in mind about tax residency:
- The mere fact that you do not currently live in South Africa is not enough to break tax residency. This kind of thinking is likely to land you in trouble with SARS.
- All aspects of both tests must be considered carefully on a case-by-case basis in order to determine whether an individual will be able to satisfy the burden of proving non-residency on a balance of probabilities.
- Think long and hard before you make this declaration to SARS, as to whether your non-resident status can be proven with objective evidence, or whether it will be dismissed as untrue.
- Any mistakes made with SARS are no longer administrative mistakes, the term “wilfully” has been removed from the Tax Administration Act when handling non-compliance.
- This means SARS now has the power to hand taxpayers over for prosecution if they rely on negligence or mistake in issues of non-compliance.
What are the implications if you tax emigrate after 01 March 2021?
- Emigrants who cease tax residency and wish to transfer less than R1 million per individual per calendar year will not require a TCS.
- Where the individual has ceased tax residency and wishes to transfer between R1 and R10 million abroad will only be allowed to do so once they have a TCS.
- Emigrants who are no longer tax residents will be subjected to a strict verification process from SARS before they will be allowed to move more than R10 million out of the country, including approval from FinSurv.
- This is to allow for a risk assessment in terms of the anti-money laundering and countering terror financing requirements contained in the Financial Intelligence Centre Act.
- The assets of an individual who ceases tax residency will be transferable, subject to rules contained in Circular 6.
- Of particular interest to most emigrants is the payment of lump-sum benefits, and withdrawal of retirement funds will be permissible only where the individual has maintained their status as non-tax resident for at least three consecutive years.
- Natural person emigrants (non-residents) and natural person residents will be treated the same, which means that:
- A blocked Rand account will no longer be required to control an emigrant’s remaining assets.
- Income and capital distributions from inter vivos trusts may be transferred abroad and pre-inheritance gifts may be transferred abroad.
- In all of these cases, the offshore transfer will be subject to tax compliance and where the amount exceeds R10 million, the stringent tax verification process will be applied pending approval from FinSurv.
What happens if I emigrated on or before 28 February 2021?
You probably already know that there is a grace period that allows emigrants who have had their MP336(b) forms stamped and signed by an Authorised Dealer on or before 28 February 2021, to apply for a TCS status before 28 February 2022. This will allow for the previous exchange control/formal emigration process to apply to your situation, and you will be able to access lump sum benefits on withdrawal of your retirement funds (specifically preservation funds and retirement annuity funds) in line with previous rules.
FinGlobal: tax emigration specialists
Determining your tax resident status isn’t something you should tackle on your own and FinGlobal’s team of tax experts is ready to help you figure things out. We’re ready to handle all aspects of your cross-border financial portfolio, including:
- Foreign exchange
- Tax clearance
- Tax refunds
- RA withdrawals
To see how FinGlobal can assist in getting your money where it needs to be, leave your contact details and we will be in touch to discuss!