New tax implications when ceasing South African tax residency

One of the most important aspects of emigration planning is knowing exactly what to expect from a tax perspective if you plan to cease tax residency in South Africa. The 2022  Budget Speech indicated a number of important changes that will apply to South Africans who move abroad. Let’s unpack these changes, and their implications on your tax position so you can ensure that you’re properly prepared in order to avoid any nasty surprises when it comes time to file your tax returns with the South African Revenue Service.

No more double-dipping on your SARS tax return

Expect two assessments in twelve months

Where natural person (in other words, you’re a human being, not a company) ceases to be a tax resident at a certain point during a tax year of assessment, section 9H(2)(b) of the Income Tax Act 58 of 1962 deems that year of assessment to come to an end on the day before your tax status changes from resident to non-resident.

According to Section 9H(2)(c), your next year of assessment kicks off on the actual date that your tax residency ceased. The practical effect of this is that you can then be exposed to two back-to-back tax assessment years within a 12-month period. Previously, this gave you the opportunity to claim certain tax exemptions and exclusions available only within a single tax assessment year twice within that 12-month period – once during your first year of assessment, and then again during the second year of assessment.

Known as double-dipping, the 2022 Budget Speech proposed that legislation be amended to distribute the interest exemption and capital gains tax annual exclusion between these two years of assessment.

What does this mean? Let’s unpack using a capital gains tax example

• Where you disposed of a capital asset before you ceased to be a tax resident, any capital gain would automatically fall into the first year of assessment. If you then sell off another capital asset after ceasing to be a tax resident, that gain would fall within the South African capital gains tax net if it is an immovable property and this capital gain would then fall into your second year of assessment.
• Until now, you would have been able to reduce your capital gain in your first year of assessment by R40,000 using the annual exclusion. Furthermore, you’d also have been able to reduce your capital gain in your second year of assessment as well by an additional R40,000 as this annual exclusion applies per year of assessment. In other words, if you have two assessments in a single 12-month period, you could use the exclusion twice.

Moving forward, SA’s National Treasury intends to close this loophole in the Income Tax Act that allows individuals to double dip into certain exemptions and exclusions when ceasing tax residency. This is in line with other income tax amendments that seek to prevent expats from taking advantage of the South African Revenue Service to avoid paying tax back in South Africa.

What’s going to change?

According to the changes proposed in the 2022 Budget Speech, this R40,000 annual exclusion will only be available once throughout this double assessment period where a person ceases to be tax resident in South Africa. This means your total aggregate capital gain over both years of assessment can only be reduced by the R40,000 annual exclusion, which can only be applied once. As such if you’re planning to cease your tax residency in the near future, you should keep this pending amendment in mind as this will affect how you declare your capital gains in your tax returns.

FinGlobal: Tax specialists for South Africans living abroad

Ceasing tax residency in South Africa can get complicated quickly. That’s why FinGlobal is ready to help you every step of the way. We can help you meet all the SARS requirements for tax emigration –  from tax clearance right through to cashing in your retirement annuities and moving your finances abroad.

To get started with your free, no-obligation SARS assessment, leave us your contact details and we’ll be in touch to get the ball rolling.