Suppose you’re planning an international relocation from South Africa or you’re already living abroad. In that case, it’s time to think about the tax implications of emigrating from South Africa if you haven’t already done so. Why? Because the South African Revenue Service (SARS) does not take your physical departure as grounds for break up on its own. Until you officially complete the process of tax emigration through SARS, the revenue authority is authorised to treat you as a tax resident and expect tax on your foreign employment income.
As such, it’s essential to understand the tax implications of working overseas and the impact of your tax resident status on your SARS obligations. Let’s take a look at the process of becoming a non-tax resident in South Africa, the dangers of not completing tax emigration, and the benefits of becoming a non-resident for tax purposes.
What is tax emigration from South Africa?
Tax emigration officially informs the South African Revenue Service (SARS) that you’re no longer a tax resident. This alters your tax status for future earnings, after which you will be taxed as a non-resident (only on your income sourced in South Africa), and you will not have to pay tax on your foreign income in South Africa.
Read more: Emigrating from SA? What must be part of your Financial Emigration Plan™?
Advantages of becoming a non tax resident in South Africa
- Simplified tax affairs: You’ll pay taxes in your new country of residence, streamlining the process, and unless you have income-bearing assets in South Africa, you shouldn’t need to file a tax return with SARS after your non-resident status has been confirmed.
- Your tax obligation will be terminated: You won’t be taxed on foreign income by SARS earned after your status has changed to a non-resident.
- Early retirement annuity access: After three years as a non-resident, you can access and withdraw the full value of your retirement annuity (less tax) before the usual age of 55.
Important things that happen when you become a non-tax resident in South Africa
- Capital Gains Tax (CGT) exit charge: Leaving the South African tax system might require paying CGT on your worldwide assets.
- Three-year wait for early annuity access: Once your tax status changes to non-resident, you must maintain this status for an unbroken period of three years to cash in your retirement annuities.
The tax implications of emigration from South Africa – exit tax explained
South Africa operates a residence-based tax system, meaning residents are taxed on all income, regardless of where it is paid or earned. When you terminate your tax residency with SARS, SARS considers your worldwide assets to have been “sold” (essentially to your now-foreign self) on the day you cease residency, triggering a CGT event known as the exit tax. This is ultimately one tax payment before departure.
Exit tax payment timeline
The exit tax is due the day you become a non-resident, in other words, on the day you physically depart South Africa. Your assets are deemed sold at market value on the day before this, which triggers the CGT event.
Tax implications of emigration – what you need to know
- CGT is an extension of income tax, not a separate tax.
- As a non-resident, you’ll only be taxed on South African income.
- Emigrating creates an additional tax assessment period within the tax year.
- If your taxable income exceeds R1 million in the emigration year, you must submit a provisional tax return.
- Actual asset sales are taxed at market value on the departure date, regardless of the tax year ending.
How do you become a non-resident for tax purposes in South Africa?
To emigrate for tax purposes, you’ll need to submit a signed declaration to SARS that you have ceased to meet the requirements for tax residency, along with supporting documents like your passport, itinerary, and motivation letter. Additionally, SARS requires:
- Visa details for your new country
- New country of residence information
- Foreign tax residence certificate
- Family location details
- Details of any remaining South African assets
- Social ties and return visit information
Read more: Made your decision to emigrate? What are the next steps?
Failing to pay the exit tax – major red flag for SARS
SARS will pursue unpaid exit taxes with penalties of up to 200%. Seeking professional tax advice is vital to navigate the emigration process effectively.
The dangers of not completing tax emigration if you leave South Africa permanently:
- Double taxation: SARS might consider you a resident for tax purposes even if you live elsewhere. This means you could be taxed on your worldwide income by both South Africa and your new country of residence (if it also has a residence-based tax system). This can add up to a sizable tax bill back in South Africa.
- Exit tax: When you eventually regularise your tax status, SARS might backdate your emigration and charge you an exit tax on the value of your worldwide assets at the time you actually left, potentially leading to a higher tax bill.
- Penalties and interest: Failing to pay the exit tax or any taxes you owe as a deemed resident can lead to hefty penalties and accumulating interest.
- Difficulties accessing retirement funds: You might not be able to access your South African retirement annuity before the usual age of 55, even if you become a resident in a new country that allows earlier access.
- Future investment restrictions: South Africa might restrict your ability to invest in certain South African assets as a non-resident if you haven’t formally emigrated for tax purposes.
- Difficulties with cross-border financial transactions: If you no longer meet the requirements for tax residency, SARS now requires a Non-Resident Confirmation Letter as part of the paperwork when making international transfers. Without this, you will not be able to make offshore transfers from South Africa. This could potentially affect any inheritance income, or property sale.
FinGlobal: tax emigration specialists for South Africans abroad
Although tax emigration can seem complex, it is important to properly weigh the advantages and disadvantages in order to make informed decisions about your financial future abroad. In short, not completing tax emigration can lead to a significant financial headache down the line, with potential for double taxation, higher tax bills due to backdated calculations, and restricted access to your finances.
To clarify your tax resident status, get assistance with tax emigration, retirement annuity encashment and more, leave your contact details below and we’ll be in touch to discuss your needs.