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The benefits of switching tax residency

Being a tax swallow can help you save enormous amounts in current and future taxes.

The famous saying by Benjamin Franklin neatly summarises estate planning: ‘Only two things in life are certain: Death and taxes’.

While we can attempt to delay death through fitness, eating healthily and minimising stress you cannot avoid it. In respect of taxes, we can avoid taxes, but one cannot evade it.

Wealth management

In order to protect the financial independence of individuals and family; one must factor in the country’s present and future prospects, economic stability, not forgetting that it is after-tax returns that count while alive and on death.

So why do residents of a country pay tax?

People vote for a government which will collect taxes and in return govern for the benefit of all in the country. This includes law and order, the provision of social services and infrastructure. The government’s job is to give life to this concept and taxes levied must be for the benefit of all, including social upliftment. When a government fails to provide value then residents become reluctant to pay taxes and ultimately should vote the government out.

How can I reduce my Income Tax?

Every person/taxpayer that earns an income is liable for tax. Income under the threshold as set by Sars is not taxed.

Tax threshold: Net income under R83 100 pa is tax-free (including rentals)

Max tax rate: Net income above R1 577 301 is taxed at 45% (including rentals)

RSA tax rates 2021 (March 1, 2020 – February 28, 2021)

​Taxable income (R) ​Rates of tax (R)
1 – 205 900 18% of taxable income
205 901 – 321 600 37 062 + 26% of taxable income above 205 900
321 601 – 445 100 67 144 + 31% of taxable income above 321 600
445 101 – 584 200 105 429 + 36% of taxable income above 445 100
584 201 – 744 800 155 505 + 39% of taxable income above 584 200
744 801 – 1 577 300 218 139 + 41% of taxable income above 744 800
1 577 301 and above 559 464 + 45% of taxable income above 1 577 300

RSA corporate tax rate is 28% and dividends are taxable.

One can reduce income tax by seeking out and switching to a tax jurisdiction that has “kinder” income tax rates.

What does avoiding inheritance taxes mean?

The easiest way to avoid taxes is to be broke on death. Not a great strategy as most of us would like to believe that, materially we progressed during our lifetime.

Let’s examine the current inheritance tax/estate duty applicable to a South African.

The South African Sars formula for Estate Duty (summarised)

Total Assets less debts and winding up expenses is taxed as follows:

Total net estate under R30 million Estate Duty is 20%.

Total net estate above R30 million Estate Duty is 25%.

Eg. 1: Net estate R10 million: estate duty on R10 million at 20% = R2 million Estate Duty taxes

Eg. 2: Net Estate R70 million: Estate Duty on R30 million at 20% + on R40 million at 25% = R6 million + R10 million = total Estate Duty taxes R16 million.

My heirs live in another country, what is their position?

Globalisation has caused widespread disruption to families. It is not uncommon to find the parents in South Africa and children and grandchildren on multiple continents.

Heirs may inherit wherever they reside. Before heirs inherit the winding-up expenses and taxes have to be paid, in cash. If there is no liquidity/cash in the estate, then there is the “forced sale” of assets which often are not realised for their full value. Life insurance is often employed to create liquidity in an estate and pay the taxes. (RSA life insurance itself is an asset in the estate, is estate dutiable, even if paid directly to the heir/beneficiary)

If one relocated assets to a tax residency of a country that does not levy estate duty taxes, then the above estate duty taxes would not apply.

How do I switch tax jurisdiction?

The so-called 183-day rule serves as a rule of thumb for determining tax residency. It basically states, that if a person spends more than half of the year (183 days) in a single country, then this person will become a tax resident of that country.

It is possible to be resident for tax purposes in more than one country at the same time. This is known as dual tax residency. One of the countries would be your primary tax residency. This means that the primary tax residency determines the final tax bill; irrespective of whether the individual has paid tax in another tax jurisdiction. Dual taxation agreements between tax authorities are put in place to limit double taxation on the same income and assets.

How do I stop my current primary tax residency?

Become resident and tax resident of another country, and inform your local tax office, of your intentions.

How do you demonstrate your intentions to switch tax residency to your new and existing tax office?

Some pointers:

To obtain tax residency in a new jurisdiction

  • Abide by the tax residency formula of your new country, i.e. stay more than 183 days per annum
  • Obtain residency
  • Obtain a tax number
  • Maintain a permanent home
  • Open a bank account

To demonstrate your intentions to switch tax residency

  • Inform the local tax authorities of your intentions to relocate
  • Do not spend more than 183 days in South Africa
  • Do not retain a permanent home
  • Do not keep a dog
  • Spouse and any dependants must be permanently settled in your new country

A tax swallow follows the sun and minimises tax

One must accept that tax will be paid “somewhere” but one can choose jurisdictions that are tax-friendly. One such country is Cyprus with the following benefits:

  • No estate duty, inheritance or donations tax
  • No taxes on income and rentals up to €19 500 per annum per taxpayer (At R17: €10 500 equates to R331 500. RSA tax threshold R83 100 per annum)
  • The top rate of income tax: 35%
  • Obtain residency by property investment (only need a clear police record)
  • The 60-day rule can be applied, designed to attract quality residents to Cyprus in return for tax breaks. The rule requires a minimum of 60 days of residency per annum in Cyprus and not more than 183 days in another tax jurisdiction.

Who would benefit from switching tax jurisdictions?
In summary, a taxpayer can be a tax swallow by switching tax jurisdictions, or set up the framework to be implemented when required; saving enormous amounts in current and future taxes, and still be able to visit the home country (less than 183 days pa).

ADVISOR PROFILE

Costas Souris

Quality Group SA

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