The concept of “emigration” through the Financial Surveillance Department of the South African Reserve Bank (SARB) was phased out effective 1 March 2021 due to tax law changes. While these legislative amendments were intended to encourage South African expats to retain roots within the country, the effect has been quite the opposite, creating mass confusion around citizenship, residency and tax residency, and how these changes will impact individuals and their access to funds, differently. To provide clarity, we’re going to unpack these concepts and discuss how things have changed, and what they mean for South Africans living abroad.
South Africans emigrating
Citizenship: once a South African, always a South African
In South Africa, you can be afforded citizenship in three ways: By birth, descent, or naturalisation. Citizenship is what gives individuals rights and obligations in their country, like the right to vote, and the right to live and work in the country without the need for a permit or visa, as well as the obligation to pay taxes and abide by the laws of the country. In South Africa, your citizenship is not linked to your tax or exchange control residency. This means that you can retain your citizenship, even as a South African living abroad. In the same vein, it means that you can be a South African living abroad, and still have a tax obligation back home. Furthermore, South Africa provides for dual citizenship, which means that you can be both a South African citizen, as well as the citizen of another country at the same time.
Exchange control residency: regulating how you move your money
Exchange control residency is not the same thing as tax residency. The concept of emigrating for exchange control purposes (also known as formal emigration through SARS) has fallen away, along with the practice of controlling the emigrant’s remaining assets in SA by means of an emigrant capital account.
From now on, individuals who leave South Africa and wish to take up permanent residence and settle in another country will be required to notify the South African Revenue Service (SARS) that they have ceased to be a South African tax resident. If you cease to be a South African tax resident, you will be required to request a tax compliance status (TCS) for emigration from SARS before you will be allowed to transfer any funds abroad.
How do you know if you are a tax resident if you’re a South African living abroad?
Generally speaking, you are classified as a South African tax resident if you are ‘ordinarily resident in South Africa. South African case law (which means law that has been clarified/explained by our courts through litigation) dictates that you are ordinarily resident in South Africa if it is the country to which you will, naturally and eventually return once your global wanderings are over. In other words, home is where SARS determines that your heart lies, which means of course, that you can remain ordinarily resident for tax purposes in South Africa even if you leave the country for a substantial period if there is still intent to return. This intention is a subjective matter, and where you claim to be ordinarily resident in a country that is not South Africa, none of your surrounding actions and circumstances must contradict such claim.
Here, SARS will evaluate factors such as:
- Your place of business and personal/family interests and ties
- Your most fixed and permanent place of residence
- Family and social circumstances such as, schools, places of worship and social clubs;
- Your habitual residence – the place you frequent the most, measured over time.
If you are not ordinarily resident in South Africa, you can still be considered a South African tax resident for a specific tax period if you have been physically present in South Africa for more than 91 days in that tax year, and each of the five prior tax years, as well as for a total of more than 915 days in the previous five years. This is called the ‘physical presence’ test, for obvious reasons.
So how do South Africans emigrate now? Tax emigration: Ceasing to be a tax resident after 1 March 2021
If you have followed the process to cease to be a South African tax resident, you will have to also follow the new rules relating to the assets that you can move out of the country.
- Once you have obtained your TCS PIN and SARS has verified that you have met your tax obligations, you will be allowed to transfer up to R10 million of your assets offshore per year.
- While you will not be allowed to use the annual Single Discretionary Allowance available to residents, in the year that you cease to be a tax resident, you have the option to move up to R1 million abroad as a travel allowance without prior tax clearance.
- Your household items and personal effects to the value of R1 million per family unit may be taken out of the country by means of a SARS ‘Customs Declaration’, as long as these assets are properly declared on the relevant forms.
- Where you want to move more than R10 million offshore, you will be subject to a more robust tax verification process by SARS and you will need to obtain permission from the Financial Surveillance Department of the South African Reserve Bank (FinSurv). Before they can approve your transfer, SARS and FinSurv will ascertain your tax status and the source of your funds along with a risk assessment in terms of the anti-money laundering and countering terror financing requirements.
Accessing benefits from your South African retirement annuity and preservation fund
Before these legislative changes phased out formal emigration, SARS permitted individuals to access their retirement annuity and preservation fund savings early, if they could show that they were no longer a resident for exchange control purposes. These savings would then be paid into the emigrant’s capital account and then moved offshore. Now that the changes are in effect, if you missed the opportunity to formally emigrate, you will only be able to access your retirement annuity or preservation fund benefits if you have ceased to be a South African tax resident for an uninterrupted period of three years on or after 1 March 2021.
- Where you have not already used your pre-retirement withdrawal benefit from your preservation fund, you will still have immediate access to this benefit, as has always been the case.
- If you exit South Africa because your work or visit visa has expired, your access to the withdrawal benefit remains unchanged.
The new cessation of South African tax residency test from 1 March 2021
The new “three-year” test provides for lump-sum payment benefits where:
- The member ceases to be a South African tax resident; and then
- Maintains this position of non-tax residence for a minimum of three consecutive years on or before 1 March 2021.
This means that your three-year period can start before 1 March 2021, meaning that if on 1 March 2021 you already met the requirements and were not a South African tax resident for a period, you do not need to restart the clock from 1 March 2021.
FinGlobal: tax emigration specialists for South African expats living abroad
Ceasing tax residency by means of tax emigration isn’t a move you should make without having considered all the implications and weighed up the pros and cons. Tax emigration isn’t necessarily the clean break that most expats are hoping for, and it comes with a big surprise in the form of a Capital Gains Tax liability that comes into play on the date you ceased to be a tax resident.
Looking for advice on the best way forward as a South African living abroad? FinGlobal is ready to assist. Whether you want someone to handle your tax exit, or you’d like to transfer funds abroad post-tax emigration, we can help. Leave us your contact details and we’ll be in touch to start the process.