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Financial emigration demystified

It’s important to look at the whole picture.

Financial emigration, also known as formal emigration, is the process of changing your South African resident status with the Reserve bank to that of a non-resident. Apart from the obvious benefit to South Africans of protecting themselves from certain local taxes and currency volatility, one of the most important benefits is that retirement savings and annuities can be withdrawn and transferred offshore, even if the person is under the age of 55. 

Read: Financial emigration is the new way out

Financial emigration has inherent benefits, like certain tax exemptions, but can also be fraught with tax-related, and other, risks if not done hand-in-hand with professional, respected service providers. Many South Africans believe they are 100% tax exempt in SA once they have formally emigrated – this is one of the biggest misconceptions. 

1. Tax efficiency

When considering moving your assets off-shore, it is critical that you research the tax efficiency of the recommended structures. You need to explore their nature, including where they are domiciled and the costs.

2. Where is the money going to be invested?

You also need to understand how your money will be invested and whether the investment strategy will enable you to achieve your goals. The professionals who advise you must be knowledgeable about legislation in more than one jurisdiction, and the advice must take your overall financial circumstances, tax position and estate planning, into account.

People often want to keep things simple by taking wealth offshore in the form of a bank account in the interest of hedging against the rand. In this case, Mauritius is an easy option to consider, as the process doesn’t require face-to-face interviews with the bank.

Generally speaking, overseas banks request you to fill out a ‘know your client’ document which is similar to our Fica. It includes a certified copy of your passport and proof of address, CV, professional reference letter and or bank reference letter as well as proof of the source of the funds. This is not an exhaustive list and additional documents may be required.

Also take into consideration which countries are more difficult to get money out of in the case of a deceased estate and where inheritance taxes (estate duties) are high. Countries that come to mind are South Africa, the UK and the US to name a few.

3. Use your foreign investment allowance

Sovereign often advises clients asking about diversification and offshore investments to use their foreign investment allowance to contribute to an international retirement scheme. Choose one that generates future retirement benefits that can be paid anywhere in the world, including South Africa. This type of retirement plan would currently be considered a tax-free pension in Guernsey. The foreign investment allowance is currently R10 million (discretionary) and R1 million (travel) but you can apply to Sars for dispensation to increase this.

Your investment can be a regular contribution and/or a lump sum that was earned outside South Africa, or you can use your foreign investment allowance. However, you can’t claim your contributions to retirement annuity trust schemes (Rats) as a tax-deduction in South Africa, as you can with contributions to a local retirement annuity fund, because the Guernsey fund is not registered under the Pension Funds Act in South Africa. 

Does formal emigration mean that you are not considered a SA tax resident anymore? 

Once you’ve formally emigrated for exchange control purposes, you will no longer be a South African tax resident on the condition that you don’t meet the “ordinary resident test” or the “physical presence test” – the two tests in South Africa that determine whether you are an SA tax resident or not. Therefore, your new status does not mean that you will necessarily stop paying South African taxes all together.

Sovereign outlines that if, for instance, you receive rental income for immovable property you own, then you’ll be liable for SA tax. And, if you decide to sell this property, you will also be subject to capital gains tax.

You can also throw the concept of tax migration into this mix. When you live in a country that has a double taxation agreement with South Africa and your permanent home is in that country, you will be taxed on your foreign salary in that country and not in SA. If on the other hand, you have a permanent home in that country and also in SA, then the question becomes, where is your centre of financial influence?

If the answer is permanent residency in the other country, then SA can’t tax you on your salary – but the same rules as outlined above – apply with regard rental income and capital gains tax if you rent or sell South African property.

There will still be a tax liability in SA. It is also worth noting that this also applies even when you have formally emigrated and broken your ties with SA.

There are good people with the right answers when it comes to unpacking the baggage around financial emigration and expat tax, just make sure you take off the rose-tinted shades and do the groundwork.  It will make all the difference to mitigating risks and navigating the right path.

Coreen van der Merwe is the managing director of the South African arm of the Sovereign Group.

The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.

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COMMENTS   14

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When you look at the state of other countries at the moment, it’s a wonder anyone would leave one disaster area for another! Better to stay here with our great wines, wildlife, wonderful weather and people you know and understand ( warts and all!)
The grass is not always greener on the other side!

… and dodge a few bullets while enduring robberies, hijackings, rapes and murders all around you all the time (until it happens to you)

Keep your kids indoors, drive them to school, lock yourself in your house at night and hope nobody comes in with machetes, knives or guns to rape you or your kids.

Yes. Stay here. It happens everywhere.

NOT.

The problem with many South Africans is that they allow emotion to rule their decisions. If it makes sense in your personal circumstances to leave, then leave. If you don’t want to leave don’t. Your chances of being a victim of crime are not that high if you live in a secure area. If you are wealthy and have kids, or don’t have kids, or your kids are adults, then it would be self-defeating to substitute a high standard of living in SA for scrounging around in a foreign country. Similarly, the loss of friends and family support should not be underestimated, and for non English-speakers, the loss of language.

The first world is undergoing an era of increasing turbulence as extremist ideas gain traction, and are promoted through the internet. Apart from Russia and its failed nuclear power plans, South Africa is boring, and uninteresting to the great powers, and this is a good thing (South America is another such “boring” place). Strategically, it could make sense for most South Africans to take a stand, and fight for the future, than to trade one form of uncertainty, for another.

spark, are you living in Bonteheuwel or Mannenberg?

And what if you’re in an industry where there’s barely any work available (eg. construction)? And you have school leaving aged kids who also can’t get into varsity despite a and b grades (no space available) and can’t find work? And you’ve been robbed, mugged, held up at gun point all in the last 4 months? Or you’ve had a few friends and family members who have been killed and traumatised over the years? And you’re being threatened with having your property and pension taken away?

While you have the opportunity to go places that also have great wines, wildlife, weather and it’s all more affordable because you’d be earning 4 times more, while costs are equal or less? Quite frankly, I don’t understand the majority of people in this country as well as I understand the people in other countries, who all have similar work ethic and values that share the same heritage as me.

Sometimes, the grass is greener. And it seems most people who advocate staying (like homecoming revolution… what’s with all the revolutionists here???) have never even stayed anywhere else, let alone been exposed to that level of education that only comes with travel and exposure to the multitude of different people and cultures you get around the world. Generally, that exposure is completely unaffordable when being based in a disaster area so far away. This is especially frustrating to highly qualified or talented individuals who are skills shortage candidates yet still can’t find meaningful employment, (heck, even those that just have a grade 12), unless moving to other “disaster areas”, where unemployment, crime and knee jerk reactions aren’t as prevelant as they are in this disaster area.

Some unsolicited advice if I may, perhaps avoid the looney liberals mouthpiece for a while. Minitrue are hard at work and seem to be the only people employing at the moment.

People move for work all the time. Its hard moving but humans have done it for hundreds of years. If they like their environment they stay for a while. It’s all a personal decision.

Have to ask yourself the question would you rather sit in South Africa when the world turns upside down or in a first world country?

Move to Australia in March 18, took me a while to accept that a 3m tall fence, electric wire, having to live in a modern day prison (or as we call them in South Africa, estates..) is not the only option you have.

Paying $70 in total for the birth of our first child.. went through the Australian public health system.. world class service.

Walking into a grocery store, packing a trolley full of food and doing a self checkout with nobody looking over your shoulder.

Driving 2000km, stopping next to the road at a truck stop.. setup the swag and sleep next to the road only to be bothered by a couple of kangaroos hopping by.

Getting rid of the underlying stres you learn to live with in South Africa & fueled on by a media system purposefully out to drive hate.

Family and friends are missed dearly and would have loved to see a kudu standing next to the road again… But then I see my kid and realise why the grass was and still is greener.

That’s great. Just be aware of how you are perceived by people in your new country. South Africans have an unfortunate reputation there…be careful not to fuel it.

I’d like to see how you can set this up whilst living in SA/anywhere. The only reasonable solutions I’ve seen are setting up businesses in a capital friendly country which allows you to grow internal profits at low taxes/nil and then you use your discretionary allowances to fund it.

Are there any other viable alternatives, so it is irrelevant where you live, but you can grow your investments without high SA taxes whilst living here?

Something that Moneyweb should please get more exact facts published on is the issue of when foreign investments are subject to foreign estate tax.

example : you own Microsoft shares in a share portfolio. It is US listed therefore US asset BUT it all depends how it is held.

The impact is huge : 40% estate duty in US and in terms of double taxation, you won’t pay that and ours but you will pay the highest one…

Advisors like to get people to hold share portfolio via a trust or company (fees). I have also read that if your shares are held via a broker in say Jersey bank, then because the shares are in their nominee account not actually in your name in Microsoft share register, you escape and only end up paying the SA estate duty (assuming you are SA tax resident).

Johan ,I don’t know about the US but I do know that the UK looks through the nominee to the place of registration of the underlying security. If you are asking the question you have US registered securities worth well more than 60K USD. You can house these within an insurance wrapper. Your estate will still pay SA tax(20%- 25%) but no exec fees. Also, CGT at 12% and IT at 30%. It will be shielded from US estate tax.
One of the downsides, of course, is another layer of fees which may be justified under a specific scenario. Not essential to go via an advisor.
Fewer fees if you use unit trust like funds instead of running the portfolio yourself via an underlying securities account. But running the money yourself is your thing hey?

ICE:

Thought I commented. Thanks, thought wrappers no longer allow self-directed investing? Which should I look at?

Try old mutual and Investec. Maybe Sanlam and Momentum as well but you will likely need to go via an intermediary.
And be aware of pros and cons, especially in the context of this article – if you head off to greener pastures before the 5 year restriction period is done you may be facing a choice of double tax or early withdrawal penalties.

Emigrated over to Australia in March 2018. The facebook groups have been bombarded by financial emigration agents scaring people into financially emigrating as soon as possible using the expected change in expat tax news artivles which have been making some noise.. most fall for the scare tactics and pay thousands to these “experts” to avoid the double tax they will be supposedly paying. It’s a shameful tactic, this article clears it up really well.

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