Death knell for ‘financial emigration’

Process change will clear up confusion – and tax emigration is still possible.
The emigration process will now move to Sars, with a mechanism to see when the foreign income exemption is or isn’t applicable. Image: Shutterstock

The bold move by Finance Minister Tito Mboweni to phase out the “administratively burdensome” process of emigration through the South African Reserve Bank (Sarb), announced in his budget speech on Wednesday, received wide applause.

Government is sending out a clear message that the abuse of financial regulations to create a tax industry that cross-sells banking solutions as a tax process or a “tax status change” will no longer be tolerated, says Hugo van Zyl, cross-border tax and exchange control specialist.

“It is of great interest to note that it is clearly only the Reserve Bank formal emigration process and not the tax emigrations that are being given a sunset death knell.”

Bold move

Van Zyl says it was a bold move to bring to an end the incorrect use of a bank process as a tax compliance process.

Henry Hollingdrake, director at Falcon Marine Consulting, says the phasing out of the emigration process through Sarb will bring to an end the concept of “financial emigration”.

“It created confusion for South African expats, and in fact has resulted in incorrect advice being given,” says Hollingdrake.

“Expats were advised that once they have ‘financially emigrated’ then they are no longer tax resident in South Africa.”

The catalyst for the ‘financial emigration’ solution was the change to the tax exemption provision in the Income Tax Act on foreign earnings of South African tax residents abroad.

Tax-free limit raised

Initially the tax-free amount was limited to R1 million per annum, but Mboweni announced an increase to R1.25 million in his budget this week. The change will be effective from March 1.

Hollingdrake says people who “financially emigrated” were under the impression that they escaped the SA tax net and that their foreign income would not be taxable in SA.

“This was incorrect, as financial emigration is merely an indicator that someone may be non-resident [for tax purposes]. In fact, certain SA expats who have financially emigrated are still tax resident since they are still considered to be ordinarily resident in South Africa,” says Hollingdrake.

Shift to Sars

The emigration process will now shift to the South African Revenue Service (Sars), and there will be a validation confirmation process to see when the Section 10 foreign income exemption is applicable or not. For this the ordinary resident test and the physical presence test will still be used to determine the tax status of people living and working abroad.

“What remains now for SA expats will simply be, and it is actually not that simple, to prove that they are [tax] non-resident,” says Hollingdrake.

“There will be no single formal application process that one must go through. There will be a validation confirmation, however, this will be predicated on not being ordinarily resident in SA.”

Bernie Herberg, director at Stonehage Fleming, says the rules for emigrants withdrawing funds from retirement funds will be amended as these presently require proof of Sarb emigration.

Restrictions repealed

Restrictions applicable to emigrants such as not being able to have SA bank accounts, or to borrow or invest freely in SA have been repealed.

“Under the new system, natural person emigrants and natural person residents will be treated identically,” says Herberg.

Keith Engel, CEO of the South African Institute of Tax Professionals, says that while the devil is indeed in the details, the proposed changes appear to be one of the most significant changes to exchange control for both individuals and corporates in the last 20 years.

National Treasury is literally shifting the default to say all is allowed for moving funds offshore “but for” certain relatively narrow restrictions. 

“Perhaps the hope is that the South African desire to emigrate will no longer exist if one is free to exit at any time,” says Engel.

“Of special interest is the corporates. Will South African companies be free to enter most cross-border transactions free of interference? If so, South Africa may have a chance of being a regional financial hub after all.”

Herberg notes that the so called anti-loop structure exchange control rule has been very restrictive over the years. “Simply stated, South African residents cannot invest in a foreign entity that then invests back into South Africa.”

It is indicated that the anti-loop rules may be scrapped, but only after relevant income tax amendments are made to address the avoidance of tax on dividends and capital gains tax through loop investments.

AUTHOR PROFILE

COMMENTS   11

Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in to comment.

SIGN IN SIGN UP

With a;; due respect to Mr Hugo van Zyl – People may stop financial emigration and just emigrate full stop. The trajectory of SA is like that of a Boeing 747 Max in its death dive !!!

Being American THEY WILL NEVER LET YOU GO!! I have to file here and there EVERY YEAR 🙁

Land of the… free?

Don’t mock the US. The current score is:

TRUMP = 10
RAMAPHOSA (extention of Zuma) = 1, maybe a 2 if I’m generous

Andrew Henderson has been trying to (legally) escape US tax based on their citizenship status.

Have been following “Nomad Capitalist” site for a long time. Useful website (especially for US citizens)

https://nomadcapitalist.com/

Oh no. I don’t mock them. My only issue with trump is his environmental policy and their federal taxes on foreign income (which isn’t trumps call… also they benefit from tax while living overseas), but they are a federal and capitalist system, so that’s just about moot.
With no links,I’ve put in my diversity visas deligently.
I’m not quite sure how you’re crediting squirrel with 1? Wasn’t that potential 1 expropriated?

…so true ….if you are born in the US and the next day on a flight out, raised indefinitely in another country …you remain a US citizen and taxes demanded on income
Banks in Europe for fear of sanctions are closing accounts on advisement from US authorities, on those citizens now domiciled having been born in the US

The anti-loop rules always made sense to me. Other than tax evasion, there is no commercially sensible reason why you would through a series of transactions with what is in effect yourself move ownership of your south african farm or business to an island where you were not borne or have citizenship but that happens to be a tax pariah money laundering haven.

Its way better than giving the money to the ANC thieves who use it fund a decadent lifestyle, their voters and stolen silly SOEs. Cant blame a rich chap for doing a loop…and its quite easy to get around the SARS net if you have a relative offshore….

Serves the looting ANC right if the rich flee with their assets

The SARB calls it “formal” emigration. (Everyone else name it financial emigration 😉

Formal Emigration is optional (and is no guarantee that SARS will see you as a res-resident for tax purposes. That’s what SARS’ Ordinarily & Presence Tests are there for. Formal emigration is seen by SARS as one the the “indicative steps” that you’ve taken towards becoming a tax-resident of another country.

Formal Emigration (until its abolished) used to be the only way for persons under 55-age able to cash in their local RA Funds in one lump-sum, after tax. Will need SARS Emigration tax clearance as well. (will see how this process gets effected?)

But Formal Emigration has also placed restrictions on SA residents bank card & other online banking facilities. If you just leave, the bank still sees you as SA resident (so you can still transact online), while SARS may deem you emigrated (after you declared your deemed CGT disposal & pay your,loosely termed, “exit tax”). Bit of anomaly, but it’s entirely possible.

The alternative is not to financially emigrate….if you don’t need to access your RA before 55….but have resigned/cashed-in from employer pension/provident funds (after paying steep tax).
Or one can live abroad & just wait for 55 to pass, and then you can “retire” normally…take the R500K tax-free lump-sum & only drawback is your 2/3 annuity remains in SA, paying you a monthly pension in ZAR. But you can also try to deplete it faster, by choosing the max 17,5% annual withdrawal rate (but be mindful of higher income tax)

To be emigrated and both have saved up pensions/ retirement plans from your foreign country & annuities left behind in SA…could be the lowest tax benefit (as you’ll pay income tax on pension “at source” in both SA & foreign country as your new home. Won’t be combined, so you’ll enjoy the primary rebates from both countries. (Just ensure your living annuity is linked to global funds to protect against ZAR depreciation.)

MichaelfromKlerksdorp ….thank you for this ….snipped tooled this comment 🙂

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

The Budget Speech explained
Moneyweb’s 2020 national budget offering, including infographics and audio ratings, as well as past budget coverage....

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: