Understand Tax Emigration When Leaving South Africa

If you are about to leave South Africa make sure you understand the pros and cons of tax emigration and how to proceed, advises William Louw, professional tax advisor and director at Sable International.

In January 2021, the Law Amending Tax Laws (TLAA) was signed, which removes the distinction between residents and non-residents for exchange control purposes and thus essentially eliminates financial emigration.

A key benefit of financially emigrating was that if you were identified as non-resident by SARB, you could access your retirement pensions before they were due and transferred
them out of the country.

Now the government needs another way to determine if a person has emigrated before gaining access to their pension funds.

Tax emigration

The South African Revenue Service (SARS) has a number of criteria that can be used to determine your tax residency status and whether or not you should pay tax in South Africa even if you don’t
live there longer.

SARS studies factors such as the time you spend in South Africa and where your family and assets live.

Upon tax emigration, SARS must be informed that your tax status has changed and that it indicates how or not you should be taxed in South Africa. Most importantly, as a South African resident taxpayer, you pay taxes based on your worldwide income and wealth base.

Whereas a non-taxable resident only pays taxes on their South African income and wealth base.

Typically, you will contact the South African government in three ways:

  • SARS determines how you will be taxed.
  • The South African Reserve Bank (SARB) regulates how your money flows in and out of the country.
  • Interior documents your citizenship status and your rights in and outside of South Africa.

Taxpayer or Tax Resident?

There is a difference between a South African taxpayer and a South African resident taxpayer. An “SA Taxpayer” is someone who is required to pay or disclose income streams in South Africa.
This is regardless of whether you are an SA resident for tax purposes or a non-resident SA tax resident and receive income from SA sources.

Whereas an “SA Tax Resident” is someone who has to pay tax on their worldwide income in SA.

What steps need to be taken for tax emigration?

Your tax residency status defines how you will be taxed in South Africa and what you will have to pay tax on to SARS. Filing a tax return, however, depends on whether or not you have to pay
Tax and not tax domicile.

There are currently three ways to change your tax status:

1. The normally resident test

The first way involves the usually resident test. This concept is relatively subjective. You will normally be considered ordinarily resident if your permanent residence to which you will ordinarily return is in South Africa. However, the courts have ruled that anyone considered ordinarily resident includes:

  • Those who live in a place with some degree of constancy
  • Those with permanent homes
  • The ones who kept their belongings
  • Those who regularly return to a place after a temporary absence

If you are able to prove otherwise, this SARS test will prove that you do not intend to be a taxpayer in South Africa, but rather to live in another location permanently.

2. The physical presence test

The second way is the physical presence test. This concept is completely time-based and only applies to persons who were not in South Africa at any time during the relevant tax year.

It is important to note: if you want to prove that you no longer wish to be taxable in South Africa, you can be captured by the number of days you spend in the country. To be considered resident for tax purposes, you have been physically present in South Africa for one or more periods of time that exceed:

  • A total of 91 days in the tax year under review;
  • A total of 91 days in each of the five tax years preceding the relevant tax year; and
  • A total of 915 days in the five previous tax years mentioned above.

The third bullet averages 183 days a year. If you do not meet all three requirements, you will be considered a non-resident.

3. A double taxation agreement

Double taxation agreements (DTAs) are internationally agreed legal provisions between South Africa and another country. South Africa has dozens of such agreements with various
Countries and the main purpose of a DTA is to ensure that each country subject to the agreement knows what tax rights they have against relevant taxpayers.

A DTA ensures that you are not unjustly taxed in South Africa as well as in the respective country. It offers a defense against double taxation and determines where to pay tax on income received.

A DTA becomes relevant if you are earning income both in South Africa and abroad, or if you are a South African tax resident (but have no income from a South African source) and earn income from a foreign source.

This type of situation often creates confusion about where you can or should be taxed, especially considering the fact that a South African resident taxpayer is taxable in South Africa on his worldwide income.

What are the consequences?

Note that you must notify SARS as soon as your tax status changes and that you should do so during the tax year in which the change occurs.

If you do not notify SARS of the change, they can assume that you are liable for tax in South Africa. This entitles them to issue tax bills and tax you if they do
should not.

If tax becomes due when you change your tax status, SARS may impose administrative penalties for non-return and non-payment. These penalties can be up to 200% depending on the case.

When should tax emigration be reported?

Tax emigration should be reported on the tax return for the period in which you change your tax status. You may report SARS much later than the actual event (given the tax year cycles).

However, it is important to be aware of the changes that will be applied retrospectively upon filing.

If you report the change at a later date, SARS may require you to pay tax on the asset base you had at the time the change was notified, not when it actually happened.

When would the taxes be due?

The day before you become tax resident, it is assumed that you are disposing of your global asset base at market value. This triggers a Capital Gains Tax (CGT) event, also known as a redemption fee.

CGT is part of income tax and comes into play when you make a profit on selling something you own (an asset). Tax is calculated on the profit you make, not the profit
Amount you sold it for. The day you become non-resident, you will be deemed to be buying back your asset base – all for tax reasons.

However, solid properties in South Africa are exempt from this equation as they are always subject to South African tax.

If you change your tax status, SARS will assume that an additional assessment period will be due during the tax year. This requires a provisional tax return, though
Your taxable income exceeds R1 million for that tax year.

In this case, your taxes will be due on the day of your departure, even if the tax year has not yet expired. If you fail to pay at this time and return at a later date within the same time period, SARS may revert to the date you left and claim a late penalty.

What happens if you change your South African tax residence?

The day before you become tax resident, it is assumed that you are disposing of your global asset base at market value. This triggers a Capital Gains Tax (CGT) event, also known as a redemption fee.

  • Until you change your tax status, you will be taxed on your worldwide income as usual
  • On the day of the change, you will have to pay an exit tax (CGT).
  • On the day of the change, you may be required to report your South African source income and pay taxes. After you are no longer a resident of South Africa, you will no longer need to file a South African tax return unless you still have assets in the country that is generating income streams.

It is important to understand that changing your tax residence does not mean you will automatically be financially emigrated, and you may not even benefit from applying
financial emigration.

How to emigrate from South Africa

Changing your tax residence status is a tedious and administration-intensive process. You have to deal with several different parties. There are also a number of complexities that you need to consider beforehand when making decisions about changing your tax residence.

Because of this, many people choose to use professional services to do the process for them.

  • By William Louw, Professional Tax Advisor (SA), Director: SA Tax, Sable International

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