As South African expats come to terms with the fact that a tax emigration with the South African Revenue Service (SARS) is inevitable when cementing the decision to permanently reside abroad, many are wondering what the tax and cash flow impact of this decision will be. Capital Gains Tax (CGT) has received a lot of attention in this context, since a change in tax residency triggers a deemed capital gains tax on worldwide assets.
But what is Capital Gains Tax and why does it have an impact if you’re no longer living and working in South Africa? Let’s delve into the details to understand what CGT is, how it’s calculated and when it’s payable when emigrating from South Africa.
Capital gains tax
What is capital gains tax?
Capital Gains Tax was first introduced in South Africa on 1 October 2001, therefore all assets acquired before this date are excluded for CGT purposes. A capital gain arises when you sell an asset of a capital nature at a value that is more than the original purchase price. This profit or gain that is made on the sale, is the portion that will be subject to tax. Capital gains are not taxed as a separate item and it can simply be declared as part of your total taxable income, which is taxed according to the individual tax tables. And that’s capital gains tax explained in a nutshell, but what about deemed capital gains tax?
What is a deemed capital gains tax/exit tax?
South Africa has a residence-based tax system. Tax residency is therefore determined by meeting the requirements of either the physical presence- or the ordinary residence test. In the event that a taxpayer no longer meets the requirements to be classified as a tax resident by either of these tests, they are required to complete a tax emigration to change their residency status to non-resident.
In simple terms, SARS assumes that when you cease to be a tax resident you are ‘selling’ or deemed to have sold all your assets – even those held in foreign countries. In effect, you are exiting your South African interest and transferring it to a different country.
The deemed capital gain or loss is the difference between the total value of your taxable capital assets (subject to certain exclusions) the day before you ceased to be a tax resident and the value at which you purchased those assets. The reason why it is a deemed capital gain, is of course, because you are not obligated to realise the sale of any of the assets that you own.
A deemed capital gain is treated exactly the same as a realised capital gain, in that it will form part of your income tax return and it is not treated as a separate tax item.
How do you calculate a deemed capital gain?
To determine a deemed capital gain or loss, you will need the following information:
- Base cost – The base cost of the asset is the price that was initially paid to acquire the asset plus any expenditure on renovation or improvements.
- Value of proceeds -In the event of a deemed disposal, the proceeds would be the market value of the asset one day before you cease to be a tax resident.
If the market value of the asset is more than the base cost, it is a deemed capital gain. Simple as that.
Is the total profit/gain taxed by SARS?
Now for the good news – capital gains tax in South Africa is taxed at a lower effective rate than your normal income, because only a portion is included in taxable income – 40% to be exact. In addition, there is also an annual exclusion of R40,000 that can be deducted from the total capital gain amount.
Seems complicated, doesn’t it? Let’s look at an example to clear things up – assume you purchased an asset for R100,000 and spent an additional R100,000 on improvements. The day before you cease to be a tax resident the market value of the asset is R400,000.
- Base Cost: R100,000 + R100,000 = R200,000
- Proceeds: R400,000
- Deemed Capital Gain: R400,000 – R200,000 = R200,000
- Amount Included in Taxable Income: R200,000 – R40,000 (exclusion) = R160,000 x 40% (inclusion rate) = R64,000
Which assets are subject to deemed capital gains tax?
The reason why an Exit Tax charge can often have such a massive financial impact on a tax payer when finalising their tax emigration, is the inclusion of offshore assets in the calculation. Given the devaluation of the Rand over the last couple of decades, a deemed sale of a foreign asset will result in a capital gain far larger than the underlying asset performance.
It is therefore of the utmost importance to understand which assets will be included in a deemed capital gain calculation to properly prepare for any cash outflow that will occur. It includes (but not limited to), the following:
- Offshore Property
- Offshore and Local Shares (including unit trusts, share portfolio’s, ETF’s, employee share options)
- Offshore and Local Company or Close Corporation Interests.
- Other physical & digital assets such as Kruger Rands and crypto currency.
Are there any exclusions?
Certain assets are excluded from capital gains tax. Some of the more relevant exclusions include:
- Immovable property in South Africa – A property in South Africa is not subject to deemed capital gains tax. The capital gains tax will become due upon realised sale. If it was utilised as a primary residence, you are eligible for a R2 million exclusion.
- Personal use assets – personal belongings such as vehicles, furniture, household appliances etc., are exempt from deemed capital gains tax.
- Retirement lump sum payments – retirement lump sum payments are taxed as a separate item by SARS.
- Approved tax-free investments
- Policy proceeds – proceeds from endowments or life insurance policies are not subject to CGT.
When is a deemed CGT payable?
Once SARS has assessed your tax emigration application and approves your non-residency application, you will be issued with a tax assessment indicating if there is a balance owing. If there is, the payment will be due immediately. In certain cases a grace period of 30 days is granted.
FinGlobal – emigration experts at your disposal
If the thought of tax emigration and capital gains tax leaves you a little bit confused, then look no further. FinGlobal’s team of tax experts are ready to assist with all your tax related matters – from tax emigration, capital gains tax and tax clearance to general tax compliance.