CAPE TOWN – In this article Tracy Muller from Nedbank Private Wealth answers a question from a reader who wants to know what the consequences are of no longer being a tax resident in South Africa.
Q: I am moving to the UK next year with my company and will become tax resident there rather than in South Africa.
In order to formally emigrate, I understand that SARS will require me to pay capital gains tax (CGT) on my worldwide investments. I have two questions related to this:
Firstly, how would SARS treat the CGT on my primary residence if I decided to keep it? Would the exemption of ZAR 2 million apply or would they levy the tax without the exemption?
Secondly, will capital gains on my offshore investments, denominated in US dollars, be calculated on (a) the pure capital gain in dollar terms only multiplied by the current exchange rate or (b) the pure capital gain plus any exchange rate depreciation since the investment was made?
So, in a simplified example, if I had bought 100 Microsoft shares at $1 per share and an exchange rate of ZAR/USD 1:1 and the share price is now $2 and the exchange rate ZAR/USD 10:1 would SARS levy CGT on $100 or R1 900?
A: South African tax residents are subject to a residence basis system of taxation. In other words, they are taxed on all of their worldwide income and gains.
Non-residents, on the other hand, are taxed on a South African source system of taxation. That means that they are taxed on their actual or deemed income sourced in South Africa and capital gains arising on immovable property and assets of a permanent nature in South Africa.
A South African tax resident will cease to be a resident for tax purposes the day immediately before he or she becomes a resident in another country. You can read the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2012.
According to the Income Tax Act, when a person ceases to be a resident of South Africa in any year of assessment, that is deemed to be a disposal for tax purposes. Effectively, the person is treated as having disposed of his or her assets (subject to certain exclusions) for an amount equal to the market value of the assets on the day before he or she ceased to be a resident and then bought them again for the same market value the following day. Ceasing to be a tax resident in South Africa thus triggers capital gains tax on the person’s worldwide assets.
There is however a particular exclusion pertaining to immovable property in South Africa, on the basis that capital gains tax will apply on the actual date of sale. So should a person who ceases to be a resident for South African tax purposes decide to retain his or her primary residence, various factors will need to be considered, on a case-by-case basis, to determine whether or not the primary-residence exemption of R2 million will apply on the ultimate disposal of the property. Some of the factors to be considered are :
a) The facts surrounding whether or not the person ordinarily resides or resided in the property as his/her primary residence.
b) Does the person own a primary residence in the country in which he/she now resides?
c) For a person who no longer resides in the primary residence, an apportionment may be necessary to determine the portion of the gain relating to the period of ordinary residence and qualifying for the primary residence exclusion.
It may therefore be a good idea to seek the advice of a certified tax consultant to guide you through the implications of not selling the property.
On the question of your shares, while the rules that apply to the calculation of capital gains tax on the disposal of local currency assets are relatively well understood, they are less so when it comes to the disposal of foreign currency assets. Such a disposal is basically subject to two rules:
Firstly, in the case of a natural person or non-trading trust disposing of an asset in a foreign currency after having acquired that asset in the same currency, the capital gain or loss will be determined in the relevant foreign currency, followed by a conversion to rand.
Example 1 (natural person or non-trading trust):
Base cost: 100 Microsoft shares purchased at $1 = $100
Proceeds/deemed disposal (ceasing to be a resident is treated as a deemed disposal): 100 Microsoft shares at current market price of $2 per share = $200.
The gain is therefore $100. This will be converted to rand at either the spot or an average exchange rate, which will equate to the rand gain or loss.
However, in all other instances the local currency is to be used to translate both the proceeds and the base cost. This applies to disposals by a company or trust carrying on a trade. It also applies where a natural person or non-trading trust disposes of an asset in a foreign currency, where the currency of expenditure and currency of proceeds are not the same.
Therefore the base cost as well as the proceeds will have to be converted to rand and the difference will equate to the capital gain or loss. The exchange rate fluctuations from the date of acquisition to the date of disposal will therefore be taken into account.
Example 2 (company or trust carrying on a trade):
Base cost: 100 Microsoft shares purchased at $1 = $100. This will be converted to rand at either the spot or the average exchange rate, which will equate to a rand base cost.
Proceeds/Deemed disposal (ceasing to be a resident is treated as a deemed disposal) –
100 Microsoft shares at current market price of $2 = $200.
This needs to be converted to rand at either the spot or the average exchange rate, which will equate to a rand proceeds/deemed disposal. The difference between the rand base cost and rand proceeds/deemed disposal will equate to a rand gain or loss. Exchange rate fluctuations between the date of acquisition and the date of disposal are therefore taken into account.
Tracy Muller is the head of fiduciary at Nedbank Private Wealth.
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