I currently fully own Company A, which owns shares in another company, Company B. Company B went through a funding round and I’ve chosen to sell some shares belonging to Company A. I’ve paid capital gains tax (CGT) on the share sale amount from company A (22.4%). If I proceed with financial emigration to Mauritius by purchasing a property (or my company purchasing the property), will I still be liable for paying CGT personally for my shares held in Company A? If so, can you suggest any tax-saving route to financial emigration please?
The reader raises several points in that they wish to proceed with financial emigration, which is the most important aspect of the question, and how the relevant transactions will be treated.
Financial or formal emigration means a South African resident decides they will no longer be resident in South Africa and have the intention of leaving the country permanently, the main purpose of which is to access and transfer all South African funds and assets abroad, particularly those in retirement annuities (and now also preservation funds) prior to retirement.
Those with one foot out the door
Financial or formal emigration may also be to alleviate the potential tax liability to the South African Revenue Service (Sars) of those SA tax residents who currently work abroad and earn more than R1 million a year and have no intention of returning to South Africa (this has specific reference to the amendment of the Income Tax Act, which comes into effect on March 1, 2020).
Sars’s Interpretation Note 3, issued on June 20, 2018, and dealing with the ordinarily resident definition, states the following: “Generally, if a natural person emigrates from the Republic to another country, that person ceases to be a resident of the Republic from the date that person emigrates.”
This will result in the physical presence test being applied in the following tax year to determine if they are still a resident for tax purposes. If they are absent from South Africa for 330 days over the two tax years, they will no longer be a South African tax resident. The effective date will be the date on which emigration took place.
From that date, worldwide income will no longer be subject to income tax in South Africa – only income from a South African source will still be subject to tax in the country – subject to the provisions of any double taxation agreement that may exist between South Africa and the country in which the person now resides.
When South African resident taxpayers become non-resident for tax purposes (but don’t meet the ordinarily resident or physical presence tests) they may become liable for CGT. In the case of any person approved as a non-resident, the Income Tax Act treats the move as a deemed disposal of all assets.
When a person is no longer a tax resident, it is deemed that all assets are disposed of the day immediately before the cessation of residency. It is treated as if those assets are disposed of at market value on that day and then bought again at market value (which will be the new base cost when the asset is eventually sold in the future).
Whether the asset is physically sold or not is irrelevant, as a deemed sale for the calculation of capital gains is assumed on the date of emigration.
The only exception to this rule is immovable property. The act determines that immovable property won’t be included in the deemed disposal provision, as non-residents are still liable for CGT when selling property anyway.
Company shares wall fall in the CGT net
Therefore if you are buying property in Mauritius for Mauritian residency (purchase price of $500 000 or more) and your intention is to officially emigrate and make Mauritius your new tax residence, you will be liable for CGT on all discretionary assets in South Africa except immovable property, and this includes the shares in Company A.
Considering the implications of the capital gains tax liability, it is always a good idea to calculate the total estimated capital gain across all discretionary assets and/or any tax liabilities of any retirement assets, should you be withdrawing these from South Africa, in order to make an informed decision.
It is important to note that once the individual emigrates they need to adhere to the rules from both a South African Reserve Bank and tax (Sars) perspective thereafter.
Physical presence test
The physical presence test is based on the amount of time a person spends in South Africa during the year of assessment (tax year) and also during the preceding tax years. This test is only conducted if the person is not ordinarily resident during that tax year. The requirements refer to the number of days that a person must actually be present in the country during a tax year and also during the five tax years preceding the year under consideration.
Based on this test, a person is a South African tax resident and liable for income tax on their worldwide income in South Africa if they are physically present in the country for a period or periods exceeding:
- 91 days in aggregate during the year of assessment under consideration;
- 91 days in aggregate during each of the five years of assessment preceding the year of assessment under consideration; and
- 915 days in aggregate during the five preceding years of assessment.
If a person who is a resident is physically outside of the country for a continuous period of at least 330 full days immediately after the day on which they cease to be physically present, that person’s tax residency is deemed to have ceased on the day they left the country.
It is important to remember that a natural person who is ordinarily resident, spends time outside of the country, and intends returning is regarded as a tax resident – regardless of the period of time spent outside the country.
Before making any final decision to change tax residency, or to financially emigrate, it is always advisable to consult with a tax specialist.