If you’re thinking of leaving South Africa to live and work abroad, avoid making a rash decision with regard to formal financial emigration. While relocating to another country may affect your tax residency, it does not necessarily mean that you need to go through a formal emigration process. Separate from physical emigration, financial emigration is a complex, lengthy and expensive exercise, and should not be undertaken lightly. Before contemplating the process, it’s a good idea to unpack your reasons for wanting to do so and whether such an exercise would be appropriate for your personal circumstances.
In 2008, the South African government amended legislation making provision for South Africans to transfer their financial assets overseas and, as such, financial emigration is normally undertaken by those who have been living and working overseas for a number of years and is the final step in the process of formally moving to a foreign country. Through financial emigration, a South African citizen effectively changes their residence status from ‘resident’ to ‘non-resident’ with the South African Reserve Bank for exchange control purposes. It does not affect your South African citizenship nor involve giving up your South African passport. It does, however, enable you to become designated as an emigrant and make use of exchange control facilities available to emigrants.
Those wishing to financially emigrate will need to ensure that their tax affairs are in order with Sars and will need to obtain an emigration tax clearance certificate to verify that your taxes are up-to-date, bearing in mind that Sars could request evidence of all your remaining assets in South Africa.
Keep in mind that financial emigration does not necessarily mean that a person’s South African tax residency terminates. You are able to change your tax residency without having to financially emigrate. This is because South Africa’s tax regime is a residence-based system and is dependent on how much time you spend in the country, where your assets are based and where your primary residence is situated. To become a non-resident for tax purposes, you will need to cease being a South African tax resident as defined by the Income Tax Act, with your status being determined by either the ‘ordinary-residence test’ or the ‘physical presence test’.
The ‘ordinary-residence test’ is a subjective test as to whether you regard South Africa as your permanent home, whereas the ‘physical-presence test’ is an objectives test which is dependent on the number of days you were in South Africa during a tax year. If you were physically present in South Africa for more than 91 days in total during the tax year, and for a period exceeding 91 days in total during each of the previous tax years, and 915 days in total during those previous five tax years, then you are regarded as a South African resident for tax purposes. If you qualify as a South African tax resident in terms of the physical presence test, you can terminate your tax residency by remaining outside South African borders for an uninterrupted period of at least 330 full days.
Once your financial emigration has been finalised, your South African bank account will be re-assigned for exchange control purposes as an emigrant’s capital account and will be subject to South African exchange control rules. The proceeds of the sale of your remaining South African assets will be deposited into an unblocked rand account, following which your bank will be obliged to administer your remaining assets according to local exchange control rules.
The advantages of financial emigration include that you can more easily transfer capital and income out of the country, and you are able to access the cash in your retirement funds before age 55 without being penalised. You will also be able to transfer any future inheritances out of South Africa without having to go through the exchange control process. However, keep in mind that an individual can make use of their R10 million per calendar year foreign investment allowance for these purposes without having to financially emigrate, as well as by using their annual R1 million single discretionary allowance.
It is important to note that, upon financial emigration, you will not be permitted to hold a South African credit card, apply for credit in this country or operate a normal bank account. Financial emigration can also impose restrictions on future assets that you may want to acquire in South Africa. Ceasing to be a tax resident will trigger a capital gains liability on your worldwide assets, excluding fixed property situated in South Africa, which will be deemed to have been sold at market value the day prior to your formal emigration. This means that 40% of any gain will be included in your income and subject to tax at the marginal rate, keeping in mind that you may only financially emigrate if your tax affairs are in order. Should you decide to return to South Africa at some point in the future, you will not be able to get the CGT that you paid back.
Generally speaking, financial emigration should only be considered if you are absolutely sure that you are permanently emigrating from South Africa with no intention of returning at any point in the future. If you are considering financial emigration, it is always advisable to seek advice from an expert who can take a holistic view of your tax, financial and personal circumstances in order to chart an appropriate way forward, bearing in mind that you can physically emigrate from South Africa without having to go through the hassle and expense of financial emigration.