As you prepare to embark on a new adventure outside of South Africa, you must think about your taxes. Although there are other more exciting aspects of planning your international relocation, it’s essential not to overlook your expat tax planning. Understanding the ins and outs of South African tax laws and international tax treaties can minimise your tax burden and ensure a smoother financial transition.
With that in mind, here’s the lowdown on the secrets you need to know about tax planning for future expats.
South African Tax advice – understanding tax residency
South Africa uses a residence-based tax system, meaning you’re subject to tax on your worldwide income if considered a tax resident. This applies no matter where in the world you are, as your status is determined by two primary tax residency tests:
- Ordinary residence/ordinarily resident test: This test considers factors like your primary place of residence, family ties, and economic ties to South Africa.
- Physical presence/physically present test: This test assesses the number of days you spend physically present in South Africa during a specific tax year.
- If you do not meet the requirements of the ordinary residence test, you can still qualify as a tax resident based on the physical presence test.
- Technically, you are considered a tax resident until you officially change your status to a non-resident by undertaking tax emigration from South Africa through the South African Revenue Service.
- It is important to note that even if you previously completed financial emigration through the South African Reserve Bank before 2021, you will still need to complete tax emigration to become a non-resident for tax purposes.
Read more: Expats, avoid nasty surprises from SARS, verify your non-resident tax status today!
The implications of tax emigration from South Africa
It’s known as tax emigration when you cease to be a tax resident of South Africa. This event can trigger significant tax implications, including:
- Capital Gains Tax (CGT): You may be liable for CGT on certain assets, such as property and shares, held during emigration.
- Exit tax: In some cases, an exit tax may be imposed on specific worldwide assets, particularly those with significant value.
- Foreign income tax: While there’s an exemption for foreign income up to R1.25 million, exceeding this threshold can result in additional tax liabilities.
Read more: Why tax emigration makes sense even without financial ties to South Africa.
Non-resident tax South Africa – strategic tax planning tips for expats
To optimise your tax position, consider the following strategies:
- Timely tax emigration: Plan your departure carefully to minimise tax implications. Consult with a tax advisor to determine the optimal timing.
- Expert advice: Engage with a qualified tax professional to understand your circumstances and tailor a personalised tax and financial migration strategy.
- Asset structuring: Consider restructuring your investments to minimise potential tax liabilities. This may involve transferring assets to a foreign trust or company.
- Compliance: Adhere to all tax filing and reporting obligations, even after emigration. Failure to comply can result in penalties and interest.
- International tax treaties: Take advantage of any applicable double taxation agreements to reduce your tax burden on foreign income as long as you remain a tax resident.
Important things to do your homework on before tax emigration from South Africa
- Retirement planning: Understand the tax implications of withdrawing and transferring retirement funds overseas.
- Property ownership: Consider the tax consequences of selling or retaining property in South Africa.
- Foreign investments: Optimise your investment strategy to minimise tax exposure.
- Currency exchange: Be aware of potential tax implications related to foreign currency exchange.
Minimising your South African exit tax
When you emigrate from South Africa for tax purposes, a Capital Gains Tax (CGT) event is triggered, meaning you are treated as if you’ve sold all your worldwide assets (with a few exceptions) to your foreign self. This can result in a significant tax bill if not planned carefully.
Here are some strategies to minimise Capital Gains Tax for non-residents in South Africa (aka your exit tax):
- Â Time your departure: By emigrating early in the tax year, you can take advantage of lower tax brackets, reducing the overall CGT liability.
- Staggered asset disposal: Selling assets over multiple tax years can spread your CGT liability, making it more manageable. Remember that exit tax is a deemed disposal, not a real one. Selling assets after tax emigration might still trigger CGT in your new country of residence, potentially at a higher rate.
- Understand exempt and non-exempt assets:
- Exempt assets: Some assets, like certain retirement annuities, may be exempt from exit tax.
- Non-exempt assets: Assets like South African property, exempt from exit tax, will still be subject to CGT if sold after emigration.
Read more: Selling your property in South Africa – the guide to expat Capital Gains Tax implications.
The impact of emigration on South African trusts
A common question among South Africans planning to emigrate is the fate of their local trusts. Unfortunately, trusts don’t have universal legal recognition. As such, moving a South African trust overseas isn’t feasible.
Tax implications for non-resident beneficiaries of trusts
The tax implications for non-resident beneficiaries of South African trusts have evolved. The most important things to know:
- Capital Gains Tax: Distributions of capital gains to non-resident beneficiaries are taxed at the trust level, currently at an effective rate of 36%.
- Income tax: Since March 1, 2024, income distributed to non-resident beneficiaries with a vested right is also taxed at the trust level at a rate of 45%.
To minimise tax liabilities, consider restructuring your trust into alternative vehicles like offshore feeder funds, asset swaps, or endowment policies that offer tax advantages.
Read more: Foreign trust beneficiaries – the truth about trust taxation in South Africa.
FinGlobal: cross-border tax specialists for expats
Start planning your tax strategy early on to avoid any surprises later. By carefully considering your financial situation and seeking professional advice, you can make sure your move is as smooth as possible, tax-wise. Need an expert in your corner? That’s where FinGlobal can assist. We help expats move their money safely from South Africa in a cost-effective, time-efficient, tax-compliant manner by creating a unique financial emigration plan™ for every transaction and every client.
No matter what you need to achieve, we’ll find the best way to make it happen quickly and efficiently. To put our services to the test, leave your contact details in the form below, and we’ll get in touch to discuss how we can assist you.