Before tax law changes in 2021, South Africans who relocated abroad could cash in their retirement annuities once they’d formalised their emigration with the South African Reserve Bank. This formalisation changed the individual’s status from resident to non-resident for exchange control purposes, and this change could be used to trigger the early withdrawal benefit on retirement annuities. Today, this loophole has been closed and formal emigration is no longer an option. South Africans living abroad now need to apply to the South African Revenue Service (SARS) to have their status changed from resident to non-resident for tax purposes before they’ll be able to trigger the early withdrawal benefit. However, that’s not the only change to retirement annuity withdrawal rules, and non-residents will now have to wait three years before they can utilise the withdrawal benefit on their funds. Let’s take a closer look at cashing in your retirement annuity, now that financial emigration has been phased out.

What is tax emigration?

Formal emigration has become tax emigration

What is tax emigration? It is the process by which your status changes from resident to non-resident for tax purposes. It requires approval from SARS.

Advantages of tax emigration:

• Becoming a non-resident terminates tax liability to SARS on your foreign income.
• You can access your retirement annuity after having maintained non-resident status for at least three years.

Disadvantages of tax emigration:

• You are deemed to have disposed of all your assets, triggering a Capital Gains Liability to SARS.

Who is a resident for tax purposes in South Africa?

A tax resident is someone who meets the requirements laid down by SARS. Each case will be assessed using two tests: the ordinarily resident test and the physical presence test. Failure to meet both = non-resident.

Test 1: The ordinarily resident test

• Examines the location of your primary home, where your assets are held, and where your family is based.
• If all signs indicate South Africa, you will be considered a South African tax resident, regardless of the number of years you’ve spent overseas.

The ordinarily resident test

Test 2: The physical presence test

This test evaluates the amount of time you spend in South Africa. To meet the requirements of this test, and be considered a tax resident, you must be physically present in  South Africa for:

• 91 days or more in the year of assessment
• 91 days or more in each of the previous five years of assessment
• 915 days in total during the five previous years of assessment

What are the implications of tax emigration from South Africa?

Tax emigration comes with immediate benefits – such as termination of your worldwide tax obligation in South Africa. It even comes with delayed benefits, such as the ability to cash in your retirement annuity once you have maintained your non-resident tax status for a minimum of three years.

However, while the benefits are undeniably great, tax emigration also comes with immediate consequences, which might cramp your financial outlook. This is Capital Gains Tax and according to these rules, 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 (basically you’re treated as if you sold your assets to your now-foreign self), triggering a Capital Gains Tax (CGT) event that is commonly known as an exit charge. Oh yes.  This tax liability becomes payable immediately when you cease tax residency.

What are the important things to know about tax emigration?

• It is something you’ll have to do unless you plan on paying expat tax in South Africa on your worldwide earnings if you are still considered a tax resident.
• It’s something you’ll have to do if you want to take your retirement savings out of South Africa.

When considering tax emigration it must be pointed out that:

• Tax emigration is not your instant ticket to cashing in your retirement annuity, and you will have to maintain non tax resident status for at least three years before you are eligible for early encashment.
• 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 returns) if you still have income-bearing assets remaining in South Africa.

FinGlobal: cross-border financial service solutions for South African expats

Managing your financial affairs and tax obligations in two different countries can get tricky. That’s where FinGlobal can simplify your life. Whether you need assistance with tax emigration, tax clearance or moving money to/from South Africa, we’re here to make it happen.

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