Budget shows SA expats remain top priority for Sars

Those who leave the country can’t continue to adopt a ‘head in the sand’ approach.
The government has again revealed a disproportionate focus on a taxpayer base that has steadily eroded over the past few years. Image: AdobeStock

The Budget Review 2022 was far from a ‘good news’ budget for South Africans working abroad (expats).

For the fifth consecutive year, changes have been proposed that clearly indicate that the South African Revenue Service (Sars) is still targeting expats and views them as low-hanging fruit to boost revenue collection.

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The three main points directly impacting expats are outlined below.

Apportioning the interest exemption and capital gains tax annual exclusion

The first tax proposal in the Budget Review addresses apportioning the interest exemption and capital gains tax annual exclusion when an individual ceases to be tax resident.

Section 9H(2)(c) provides that the taxpayer’s next year of assessment will start on the day their tax residency ceases.

This can result in the taxpayer having two consecutive years of assessment in a 12-month period.

The question that arises is whether the two consecutive years of assessment in a 12-month period give rise to a doubling up of the exemptions (known as double dipping) and exclusions that a taxpayer has in a period of assessment. In practice there seems to be uncertainty with regard to this issue, as there are different interpretations and applications of these provisions.

To address this anomaly, it is proposed in the Budget Review that the legislation be changed to apportion the interest exemption and capital gains annual exclusion between the two years of assessment in such instances.

Cross‐border tax treatment of retirement funds

The second proposal focuses on the cross-border tax treatment of the retirement funds of those who cease their South African tax residency.

Expatriate tax is a topic that has been hotly debated in recent years, and last year the government had to retreat when it was determined that its plan to tax the retirement interest of expats ceasing tax residency would contradict South Africa’s obligations in terms of the double tax agreements (DTAs) it has in place with other countries.

Expats who have ceased their South African tax residency already have to pay a capital gains tax when they financially emigrate, and their retirement funds are not currently included in the scope of this ‘exit tax’. However, it is evident that the government has put a bit more thought into this within this year’s Budget Review and is planning to change this.

The cross-border tax treatment of retirement funds tax proposal reads as follows:

“Consultation on last year’s proposal regarding the tax treatment of retirement interest when changing tax residence showed that multiple tax treaties need to be revised to ensure that South Africa retains taxing rights on payments from local retirement funds. Government intends to initiate these negotiations this year.” (Page 45, Chapter 4, Budget Review 2022.)

What this means is that government now plans to change many DTAs from various countries to be able to tax the retirement funds of expatriates who have ceased their financial residency in South Africa but still have retirement funds in the country.

This however is going to be a monumental undertaking from the government.

For it to action this new proposal is easier said than done. The renegotiation process is one that will take a very long time because there is no blanket approach to this. Each country has a different agreement with South Africa, the government will have to again negotiate with each country individually.

The goal of government will be to change these agreements to the effect that South Africa retains its taxing rights on payments made from local retirement funds.

When undertaking this adjustment, it must be considered why the various treaties were set up the way they were in the first place.

The treaties were initially set up to avoid double taxation of the taxpayer and to avoid evasion of taxes; to ensure fair treatment of the taxpayer and the relevant tax jurisdictions. Any revisions or adjustments must be done fairly and not put any more pressure on the taxpayer or the relevant tax revenue services.

It remains to be seen if the government will effectively follow through with its plans to tax expatriates that have ceased their tax residency.

Expatriates and taxpayers thinking of financially emigrating should however be made aware that there is a probability that it will come to fruition.

In theory, what the government wants to do can be done, but the practicality of it remains to be seen. With the treaties that need to be amended, negotiations with the different countries and the legislative aspects that need to be tabled, it will be very difficult for this proposal to bear any fruit in 2022.

Three-year lock up on pension funds

The third key area – the treatment of pension funds of non-residents – has already been in place since March 1, 2021. South Africans who have ceased their tax residency are still able withdraw their retirement funds (or any other SA policy) in full from South Africa, if they can show an unbroken period of three years as a tax non-resident.

If one intends to withdraw a personal policy in South Africa, one will require a South African bank account in their personal name. Unfortunately, policy providers will not pay to a third party nor an overseas bank account. In addition, for a successful policy withdrawal payout, the account in one’s personal name should be a non-resident account.

Two possible solutions are the conversion of one’s existing bank account to a non-resident status, or a facilitated non-resident forex facility.

Opposite of an ostrich mentality

The Budget Review once again revealed a disproportionate focus on a taxpayer base that has steadily eroded over the past few years.

It also shows that Sars has a plan and intends to keep expats in the South African tax net for as long as possible.

Expats must heed the warning and cannot continue to adopt a head in the sand approach.

The prudent course of action would be to approach a tax practice that is registered with the South African Institute of Tax Professionals (Sait) and boasts skillsets across legal, accounting and forex spheres. These skills are critical when formulating a roadmap to protect your wealth.

Thomas Lobban and Victoria Lancefield – legal manager, cross-border taxation and GM: financial emigration and tax residency respectively at Tax Consulting SA.

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There is a far easier way to deal with RA thing : create a deemed recoupment of past income tax deductions. The tax treatment of RA is you get 30y of deductions then pay tax on the annuity. If a taxpayer is not going to pay tax on the annuity, then the deductions should recoup in full.

I fail to see understand what is not fair about above.

The position I sketched above is often voted unpopular. Can any of the opponents justify why this is any different from any other longterm arrangement that is broken by one party?

when one enters into an RA there is an obvious contract : get the deductions for the term, and in return pay the taxes later.

What is often left out is that if Johnny emigrates to any of the many tax jurisdictions that do not tax foreign incomes at all, Johnny is now bargaining on having received 30 years of deductions and never paying tax on the annuity.

That is not just besides being a breach of the underlying RA tax mechanism.

Still no response. Even incoherent responses – zip zero nada. Are there 7 or more people emigrating to Mauritius hoping to get tax-free south african annuities in return for milking R350k a year tax deductions but unwilling to defend their claims?

I’d assume most tax consultants can afford a MNY subscription and could launch a defense. Apparently not. Says a lot

SARS pursues citizens trying to make an honest living, many of whom are forced to work offshore because they can’t find jobs in SA and yet the likes of the Gupta’s and dozens of officials managed to “leave the country” with their ill-gotten gains all intact as SARS remaining ever-silent on the issue.

There is something terribly wrong with “Expats must heed the warning and cannot continue to adopt a head in the sand approach” by SARS.

Yes, they must pursue the ANC cadres and their blessers.

The absolute madness of effectively chasing away SA citizens is mind numbing. Still I suppose the ANC regime wants any money now in comparison with long term flows from sensible tax policies. Oh and then there is safety and security, health, BEE and other racist madness. A rock star earning, very skilled friend in Dubai was just saying this is the last straw, he’s finally bought a house there, is well on the way to European citizenship and has two properties in NZ; turning his back on SA forever except for holidays. Great work SARS and the ANC.

I have two professionals with very talented two teen boys next door selling up and leaving for Holland.

Paul: depending where people go they might get a tax shock. You do not want to earn big income and have large assets in California for example. They would long for our rates of both income and estate taxes.

I think we are losing more locals seeking a different future for their kids than for tax reasons? When you combine our tax regime and our cost of living we are pretty OK and that is mainly why so many foreign people semigrate here. In the Winelands there are thousands of people living on EU/UK pensions – because they can live much better here than there. Weather also helps

End of comments.

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