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To financially emigrate or not?

South Africans working or living abroad may be contemplating such a move to avoid having their foreign income taxed in SA – but this won’t necessarily be the case.

There is a lot of conflicting information in the media regarding the taxation of South Africans on their foreign earnings and the effect of the implementation of the amendments to the tax law.

Currently, remuneration earned by South African tax residents for services rendered abroad is exempt from SA tax, if that resident spent more than 183 full days (including a continuous period of more than 60 full days) outside SA in any 12-month period during which those services were rendered (‘foreign earnings exemption’).

With effect from March 1, 2020, the foreign earnings exemption will only apply to up to R1 million of foreign income earned in a tax year.

Income earned abroad exceeding R1 million will not be exempt under the foreign earnings exemption.

Many South Africans who work and/or live abroad and want to ‘financially’ emigrate by placing their emigration on record with the SA Reserve Bank. They think that by taking this measure, their foreign income will not be taxed in South Africa. What they fail to understand is that this will not necessarily exempt them from paying tax in SA.

Who will be affected by the changes in the law?

It is important to understand the difference between becoming non-resident for tax purposes and non-resident for exchange control purposes.

The foreign earnings exemption, and its new cap, only applies to SA tax residents. If you are not a SA resident for tax purposes, you will not be affected by this amendment. People who have placed their emigration on record with the Reserve Bank may still be tax resident in SA.

SA tax residency

SA has a residence-based tax system. Residents are taxed on their world-wide income, except if it is specifically exempt, as is the case with the foreign earnings exemption.

A resident is defined in section 1 of the Income Tax Act 58 of 1962 (ITA) as a person who is either:

  • Ordinarily resident in SA (the ‘ordinary residence test’)
  • Or who qualifies as a resident in terms of their physical presence in SA (the ‘days test’).

Note that in order to be non-tax resident in SA in terms of the ITA, you must be non-resident in terms of both tests.

Even if you are regarded as a South African tax resident in terms of the tests under the ITA, you may still be regarded as a non-resident for tax purposes under the applicable double tax agreement (DTA) between SA and the country where you are working or living.

The ordinary residence test

The ordinary residence test serves as the point of departure; in other words, it is the first step in determining tax residency.

According to the South African Revenue Service (Sars), the following requirements need to be satisfied in order for a person to qualify as ordinarily resident:

  • An intention to be ordinarily resident in SA, and
  • Steps indicative of this intention being taken.

Sars may challenge a person’s intention to be ordinarily resident, or not, by looking at objective facts that might disprove such a subjective intention.

It is important to note that a person can be ordinarily resident in SA regardless of the number of days spent in, or absent from, SA.

The following are helpful questions to ask to determine whether you might be ordinarily resident in SA. These questions are based on factors provided by Sars which it takes into account to determine whether a person is ordinarily resident in SA:

  • Is SA the country to which I return to from my wanderings?
  • Is my primary residence within SA?
  • Where is my most settled place of residence?
  • How many days do I spend in SA compared to other jurisdictions?
  • What nationality am I?
  • Do my family members reside in SA?
  • Where is my immovable property located?
  • Where are my assets or personal belongings located?
  • Is there any documentary evidence on file (such as emails and other correspondence) which may imply an intention to permanently live in SA?
  • Where are my business and economic interests primarily located?
  • Do I have any political, social and religious ties to SA?

If a person has no intention to be resident in SA and this intention is objectively evidenced by steps taken to give effect to that intention, that person will not be ordinarily resident in SA.

The days test

The next step in determining if a person is resident in SA is to apply the days test.

If you are not ordinarily resident in SA, you may still qualify as a ‘resident’ on the basis of the number of days spent in SA over a period of six years. Intention is irrelevant under this test.

In terms of the days test, you will become resident in the following circumstances:

  • If you are physically present in SA for more than 91 days in aggregate during the current year of assessment; and
  • If you have been physically present in SA for more than 91 days per year during each of the previous five years of assessment; and
  • If you have been physically present in SA for a period(s) exceeding 915 days in aggregate during the previous five years of assessment.

In calculating the number of days, a day includes a part of a day but excludes any day spent in transit through and without formally entering SA.

In the first year of assessment in which you fulfil the days test requirements, you are deemed to be a resident from the first day of that year of assessment.

If you are deemed an SA resident because of the days test, residency can be broken by leaving SA and remaining outside of the country for a continuous period of at least 330 full days.

Double tax agreements

Should you be regarded as an SA tax resident as a result of either the ordinarily resident or days tests, the applicable DTA entered into between SA and the country in which you are living and/or working might regard you as non-resident in SA, and as resident in the other country. It is therefore essential that the terms of the DTA be checked.

Section 6quat rebate

Should you be regarded as an SA tax resident, and are taxed in another country on the same income on which you are taxed in SA, section 6quat of the ITA provides for a rebate of the foreign tax paid against SA taxes. The rebate is limited to the SA tax payable on the foreign income.

The effect of the 6quat rebate on the newly introduced cap on the foreign earnings exemption is that, for SA tax residents, all taxes paid abroad on income in excess of R1 million will be rebated against the SA taxes payable on that same income. The earnings exceeding R1 million will therefore not be taxed twice, but at the higher rate of SA or the foreign country.

Financial emigration through the Reserve Bank

The main reason for financial emigration is to break exchange control residence.

In order to financially emigrate, application is made to the Financial Surveillance Department of the SA Reserve Bank with proof of the right, either by foreign passport or an appropriate visa, to live in another country.

Through the application the person must show their intent to no longer be permanently resident in SA.

By financially emigrating, a person is strongly demonstrating the intent to have a primary residence outside of SA and not to be ordinarily resident in SA.

Summary

Financial emigration is only a strong indication that a person is not ordinarily resident in SA, and not a definitive factor. Sars takes various factors into account, and a person’s residency status at the Reserve Bank is only one of them.

Even if you can show that you are no longer ordinarily resident, you may still be tax resident as a result of the number of days spent in SA, or as a result of the applicable DTA entered into between SA and the country where you are working.

Non-residents for tax purposes in SA do not pay tax on foreign sourced income.

The amendments to the foreign earnings exemption would therefore not be applicable to non-residents as the foreign earnings are never taxable.

If you are tax resident in SA, from March 1, 2020, the first R1 million of foreign earnings will be exempt in terms of the foreign earnings exemption if you are outside of SA for more than 183 full days (including a continuous period of more than 60 full days) in any 12-month period. The amount exceeding R1 million will be taxable in SA.

If you are taxed in SA on the amount earned exceeding R1 million, you may get relief in terms of section 6quat of the ITA.

Irma Lategan is a senior associate at Maitland.

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This is the first complete and accurate article on the subject that I have seen.

Thank you.

Finally an article that makes sense and clearly and accurately lays out the facts to help you decide whether Financial Emigration is right for you. Many people do not understand the difference between a South African EXPAT and a South African TAX RESIDENT for tax purposes, thereby causing much confusion in places like the United Arab Emirates. I have stated for many months, and continue to do so, that most expat’s working in places like the UAE will NOT be impacted by the changes to the South African Income Tax Act with effect from 1 March 2020. CHARLES ARNESTAD CA(SA), CFA.

Brilliantly written Irma. Most comprehensive and factually correct article I have read on the topic.

I am afraid a lot of “emigration experts” will not appreciate your factual disclosure.

Extremely well written article – and one to which I will refer many who raise the issue. I do wish to stress however that those former RSA residents who have NOT emigrated via Reserve Bank may well provide SARS with a useful argument against their assertion that they are no longer Tax resident.

Way too many folk wrongly believe that if they formally emigrate via Reserve Bank they will compromise or lose their RSA Citizenship – this is NOT the case. However there are some nasty “traps” within the Citizenship Act which have caused many to inadvertently lose their RSA Citizenship. Scope for a separate article?

As a tax practitioner myself, I can give my stamp of approval to this well-written article.

Many expats already abroad will read this article and think: “…yeah, I’m OK, I’ve been a tax resident of a foreign country for X-years now, and am not planning to return to SA. That makes me a non-resident from SARS perspective”.

The above would be correct, but we forget to report on one final leg of becoming a non-resident of SA: you’d have to declare on your SARS return your CGT-gain (being the “deemed disposal” of your SA and foreign discretionary investments, excluding primary residence & pension/RA Funds.
It’s loosely refered to as your expat “exit tax” in the media.

The process of Financial Emigration has been abused as a cash cow, but it has its function: if you’ve already left SA for abroad (especially before 55-age), while you still have your “prescribed assets”…uhm…sorry, meant your “compulsory savings” e.g. Pension/Provident/Preserver/RA Funds tied up with SA asset managers/insurance houses…then you can use Fin.Emigration (a costly process) to get your MP336 / SARS Emigration tax clearance, etc done.
One huge problem when going the Fin.Emigration route, is that when you cash in the full fund value of your compulsory funds (prior ret age), the tax will be HUGE under the SARS Section 7(1)(a) ‘resignation/withdrawal’ table…the one with the R25,000 exemption (not R500K one).
You would easily lose a quarter or a third of your retirement capital upon withdrawal due to PAYE tax the fund has to deduct on behalf of SARS.
THIS MOVE COULD BE MORE DETRIMENTAL TO YOUR RETIREMENT CAPITAL, THAN WHAT FUTURE PRESCRIBED ASSETS COULD BE(?) Possible.

Very few mention the option of keeping your compulsary funds (i.e. the 2/3rds part that has to remain in a living annuity, post retirement)…as the 1/3 you can transfer abroad up to R1m p.a. without SARS clearance. The PAYE on the SA-leg of your living annuities (assuming you also build up a retirement savings pot abroad) will be taxed relatively low (if not anything if below the age rebates). Pensions from a SA source, will be taxed (if any) in SA, and can be declared as exempt income in most foreign countries as a general rule.
Thereby you SPLIT your source of post-retirement income between two countries…each one taxed in isolation of each other = little or no income tax (depending on income level).
And then you’d also have your life savings spread among both developed (UK,US, NZ, Oz, etc where you live) and emerging markets (like SA)

But there are no right or wrongs here: it boils down to your view of (i) either anticipating that prescribed assets…it will come, believe me due to govt debt, and the SA ret-savings pot being too huge to miss…will have a lesser long term impact on your retirement capital. Bear in mind your ret fund will be rewarded with high bond yields (due to SA risk)…and any bond default is covered by the (decreasing) number of remaining poor SA taxpayers staying behind, like me. Another future-uncertain is that SA income tax rates, including on pensions, could/will increase, so this could water down my current argument about relatively little or no SA tax on living annuity coming from SA source,
OR (ii) bite the bullet & take the tax pain now…by declaring your non-tax-resident status to SARS, and then declare your deemed CGT-gain (or loss?) and pay it, and pay the huge PAYE tax on the compulsory fund lump-sum upon full fund withdrawal, prior retirement age. Start with less abroad, try to make it up, while staking your bet against option (i).

It’s true what people say…SA is certainly an exciting plave to live compared to boring developed countries, where aspects of life are certain…look how much we try to scurry and plan for disaster events above *lol*

Excellent explanation. I’m keeping this for future reference.

Agree a well structured and succinct article.

Are there consequences when one becomes non-SA tax resident or financial emigration?

From earlier articles it would seem that Capital Gains Tax is generated if either if these 2 conditions occur? === Or is that only if financial emigration occurs?

Thanks

From personal experience, changing your tax residence triggers capital gains tax. Haven’t yet applied for financial emigration but will probably do it anyway.

@pacaratac. Excellent article, I agree.
I agree with MeinHeathen…the CGT exit tax / deemed disposal of discretionary assets (excl. your primary res & compulsory pension monies) will be triggered in the tax year when you answer your SARS return “YES” upon the question if you consider yourself to cease to be a tax resident of SA.

(Fin Emigration process does not trigger CGT, but it is regarded as ONE of the “indicative steps taken” that you have emigrated & may’ve became non-resident. But this is NOT a guarantee SARS will accept that. One has to convince SARS (if audited) that you can satisfy them with the “ordinarily resident test” and the “physical presence…number of days…test”.

(Also one’s citizenship status has little to do with “tax residency”)

I would also add, if you can help it, avoid declaring your non-residency question on your SARS return as ‘Yes’ if you still earn solid salary income from within SA, as the excess CGT-tax above R40K annual exemption, will be taxed against your higher MARGINAL TAX BRACKET…i.e. on top of your salaried income.

Once abroad, keep your SA online banking functioning, and cash in/withdraw from your various Unit trusts/ETF’s/shares in a subsequent tax year after your last SA salary is received in a prior year. Then declare that as your CGT exit tax.

So when abroad, rather allow for at least a year to pass, so that all SA sourced salaried income (and bonusses, arrear pay, etc) is past the tax year cut-off, then THEN only you declare that you consider yourself a non-resident. For this gap-year, it should do not harm to declare your expat income (as a SA resident, temp abroad) on your SARS return….as the 1st Rmillion will be exempt (if you’ve been abroad long enough satisfying the 183day/60-day rule, and you must work for foreign employer…not self employed or contractor abroad).

In most cases, when you declare foreign income onto SARS return (while the foreign salary tax credits should be enough), it’s highly unlikely you will pay for that year alone any extra income tax to SARS (as the R1m exemption will likely save you)….unless if you work in the UAE, or any other country which does not have indiv income tax regime that you can use as a foreign tax credit…you may end up with some tax-liability above R1m ZAR income.

(The CGT exit tax will have minimal or no impact on the younger person, as most still has to acquire/build up sufficient capital to have a potential CGT problem. But for those of us past their 50’s with some reasonable buildup of investments, which will cause higher CGT…plan carefully to minimise CGT impact.)

And all that is left to do, is to pray for us mortal souls left behind in SA.

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