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If it seems like there’s a lot going on when it comes to emigration, that’s because there is and it’s no wonder if you find yourself getting confused with all the terminology and jargon, because it sounds so similar. If you find yourself puzzling the difference between tax emigration, financial emigration, formal emigration and physical emigration…you’re not alone. Let’s take a few moments to break it all down, so you can see the bigger picture – whether you’re living abroad already or your emigration is still imminent, you’ll need to know what these processes entail, and how they affect you, moving forward.

Emigration, explained

Physical emigration: The act of international relocation. This involves leaving South Africa with the intention of settling somewhere else on a permanent, no-returns basis.

Financial emigration: South Africans who relocated could apply to the South African Reserve Bank (SARB) to have their status changed from resident to non-resident for exchange control purposes. This process became known as ‘formal’ emigration because individuals formalised their exit from South Africa with the Reserve Bank, the exchange control authority. While financial emigration was not necessary at this stage, one of the drawcards was that individuals would then be allowed to access and withdraw their South African retirement savings and transfer the proceeds abroad as non-residents.

This changed in March 2021 When the process of formal emigration through the Reserve Bank  was replaced with a process of tax emigration, which is subject to requirements laid down by the South African Revenue Service.

Tax emigration: While this is not a new process, the outcome is. Previously, you would only use tax emigration to terminate your obligation to pay tax in SA on your worldwide income, but now this is the only process by which South African emigrants can access and withdraw their retirement annuity savings before the age of 55. Now, in 2022, if you want to cash in your retirement annuity before you retire, you’ll need to cease being a South African tax resident by completing tax emigration through SARS.

Financial emigration vs Tax emigration: One does not equal the other

Formal emigration was completed for exchange control purposes, not for tax purposes. This means that today, formal emigration might still have to be followed up by tax emigration in certain circumstances, just to ensure clarity for tax residency purposes. Why is this the case?  As a South African tax resident, you will be expected to pay tax on your worldwide income and your worldwide asset base, but when you change to a non-resident for tax purposes, you will only be taxed on your South African sourced income and South African sourced asset base.

What are the tax implications of emigrating from South Africa?

While tax emigration comes with immediate benefits – termination of your worldwide tax obligation in SA, as well as the ability to cash in your retirement annuity once you have maintained your non-resident tax status for a minimum of three years, it also comes with immediate consequences, which might have a detrimental effect on your financial outlook. As with financial emigration, tax emigration will attract Capital Gains Tax. How does it work? The day before you become a non-resident for tax purposes, you will be deemed to have disposed of your worldwide asset base at market value, triggering a Capital Gains Tax (CGT) event, commonly known as an exit charge. That’s right. SARS takes one last swipe at your money before you take it away with you. This tax liability becomes payable immediately when you cease tax residency.

What are the main things you need to know about Tax emigration?

  • Tax emigration is necessary if you plan on cashing in your retirement savings and moving your money out of South Africa.
  • However, it must be noted that tax emigration does not offer immediate access to your retirement annuity, and you will have to maintain your non resident tax status for a minimum of three years before you can apply for early withdrawal.
  • You will be required to pay Capital Gains Tax on your exit from the South African tax system.
  • You will still pay tax (and file tax returns) if you have income-bearing assets left in South Africa.

FinGlobal: Tax emigration specialists for South African expats

If you’re interested in hearing more about how we can make cross-border tax easier, leave us your contact details and we’ll be in touch to start your free, confidential, no-obligation SARS tax residency assessment.