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Panic, uncertainty about expat tax

Tax practitioners concerned about practical application, Tax Indaba hears.

Tax practitioners say their clients remain panicked and concerned about the ‘expat tax’, despite National Treasury adopting a relatively softer stance.

“I see a lot of panic coming our way,” Bari Duvenhage, personal tax specialist at Regan van Rooy, told delegates at the Tax Indaba.

She says expats are unsure how it will impact their tax burden. Many people have no real understanding of the concept of tax residency.

“They [mistakenly] think if they are out of the country for 183 days, they are no longer tax resident and then this doesn’t apply to them.”

In the February 2017 budget, Treasury proposed that a South African tax resident working abroad for more than 183 days a year (of which 60 days are continuous) would in future be fully taxed in South Africa and would only be eligible for a tax credit to the extent that tax was paid offshore. After a public backlash, it revised the proposal so that the first R1 million of foreign remuneration would be exempt from tax in South Africa. The implementation of the amendment – previously scheduled for March 1, 2019 – was postponed to March 1, 2020.

Treasury is of the view that the previous foreign employment tax exemption was too generous, and that it could result in double non-taxation.

South Africans working abroad will escape the tax change if they are not considered tax residents in South Africa or deemed to be resident in a foreign country because of a double tax agreement (DTA) (or fall below the R1 million threshold).

Arlette Manyi, tax risk manager at the FirstRand Group, says people did not anticipate the change to have come as abruptly as it did and hoped there would be more consultation.

There are still a lot of practical issues that they don’t have clarity on. In some instances, the impact can be a “nightmare”, Manyi says.

Jonty Leon from Tax Consulting SA reiterates “the same sort of feelings of panic” from clients. 

Duvenhage says people break their South African tax residence if they are no longer ordinarily resident, or if they are considered a tax resident in another country through the application of a double tax treaty.

The complication with paying tax on foreign income is that the ‘ordinarily resident’ test is very subjective, she says.

In terms of the new provision it is unclear what would happen if an individual leaves South Africa, goes to another country (say Malawi), breaks their tax residence through the application of a tax treaty and pays their capital gains tax (CGT) exit charge, but comes back five years later. Will they be considered a resident?

In some cases, individuals may not know whether they want to retire in South Africa or if it is the country to which they will return at the end of their wanderings.

Duvenhage says the tax change is a bit too advanced for the South African tax system.

“We first need to get a proper definition, a completely objective residents definition.”

While expats could escape the tax through the application of a DTA, it can be quite complex to apply. A lot of South Africans have opted for financial emigration instead, thereby breaking their tax residency, Leon says. 

But this may come at a significant cost for some individuals as financial emigration requires them to pay a CGT exit charge.

Graeme Saggers, tax director at Nolands SA, says people who earn less than the R1 million threshold are probably in that sphere where breaking tax residency is an option, but for CEOs and C-class executives the CGT exit charge could be significant.

In instances where a person is on assignment on behalf of an employer, there may also be an expectation that the employer should pay the CGT exit charge or the additional taxes that will be incurred, Manyi says.

“There [are] a lot of practical aspects that haven’t been considered,” she says.

Tax practitioners have also expressed concern about the onerous process of claiming tax credits and warned that the change could deter companies from investing in South Africa due to the high employment cost.

The South African Revenue Service (Sars) has previously expressed concern about the vast non-compliance by many South African expats living abroad.

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This article is a lot better than the previous advertorial on the subject that Moneyweb carried.

I’ll happily pay an exit CGT charge and have no financial interest here. I will also renounce my SA citizenship once I have a new one.

Agreed.
Why should I pay a cent towards a government system that is legally forcing me as a white male fo work abroad due to bee legislation?
I am setting my affairs up in such a way that my foreign earnings are kept far away from this bunch.

Exactly. How do you do this? I’m a student and want to know for when I start working and want to emigrate. Thanks

One the reason why South Africans are even considering immigrating to countries like Panama now

Yep, I highly recommend checking out Panama and Costa Rica!

I sometimes fantasize walking into home affairs, dropping off my passport and saying “Cheers!”

And in my head I can hear the ACDC song : “Goodbye and Good Riddance to Bad Luck”

It’s interesting to see how many people are leaving SA.
Pop into your local dept of home affairs and ask the folks why they are there. Birth certificates, passports, etc to move abroad

PJJ the reality is nobody at home affairs give one single f about us and whether we leave or stay.

@laurensK

I have no illusion that anyone there would care if I leave or stay, but luckily its a free world out there, there are countries out there that will welcome skill and capital with open arms.

Likewise … unfortunately I have to wait for the Powerball payout of R90m before I can indulge in my fantasy… I will also phone Cape Talk and wish them all well 🙂

….I wouldn’t bother if you knew you were not returning and were able to get most of your funds out

Most ex South Africans have

In North America and Asia they have Typhoons – here we have government.

Tax Tax Tax … eventually we have nothing.

@Worlds Smallest Violin. If I can recall correctly, you said some time ago in another post, you’ll be leaving SA in two weeks’ time? Whereto? 🙂

You would be liable for CGT as soon as you end your tax residency.

So government officials mismanage the funds of the state and tell SARS to find more money for them. I’ve got no more words for the short-sighted and greedy people that run this country. I cant say that I’m proudly South African.

Rather emigrate than come back. With your better currencies you have more options and won’t have to pay tax to a regime that is clueless and desperate!

If employers pay the CGT exit then that too will be fully taxable income in SA. It is also not as simple as saying you are changing residency. If the wife and kids and school and house carry on here, the subjective residency test still keeps you a deemed SA tax resident.

People don’t always do the math on changes in residency. Unless your new residency is in a place that does not tax income outside that country (a rapidly diminishing list of little tax havens), the total tax effect in the major countries is likely worse than SA.

I think GEORGIA (the country) foreign income is still exempt. (Interestingly, max Indiv tax rate is 20%)

https://en.wikipedia.org/wiki/Taxation_in_Georgia_(country)

MONTENEGRO:
(…for those who don’t know this region, google “Kotor Bay”…almost as beautiful as the Kalahari 😉

Foreign income is taxed as a resident, but interestingly the Indiv tax rate is between 9-11% (no typos!!)

Nice for people/families who can work freelance, or with IT/online business (as local work may be limited).

Crime you ask? They can’t spell it…

You just listed 2 of my favorite countries that I plan to take a extended holiday to in the not too distant future with EWC looming.

The Balkans and Asia have plenty of countries that offer good standards of living (if you already have capital) and lowish crime.

I plan on doing a road trip through Eastern Europe and ending it in Asia.
My greatest fear is that I might like it so much that I won’t want to come back first 😛

Say hello to Borris in Montenegro. It is basically a russia mafia enclave. Great scenerey, just don’t query your restaurant bill

But maybe you are just looking at the % as a number; not what one actually derives from the number. The “payback” from tax payments in a first world country us generally much, much better than in third world SA where you pay the tax then have to go out and buy the services your tax should cover. Finally note that you are now earning in a stable currency, have better security of property (as well as life and limb) and limited racist legislation (and cadre benefit laws) to deal with.

It is becoming a no brainer for many wealthy and skilled people who feel threatened and vilified in SA.

Tax rate abroad is only slightly higher in most cases but your earning potential as an experienced skilled professional with a degree is a LOT higher.

Then combine the fact that inflation is lower, currency is stable, transit & security is better and living/staying in SA seems like a dumb decision only made by those either earning > 8 figures or failing at basic maths and economic theory. Yes the 1st 1-3yrs post moving you will suffer due to capital taken from SA worth little (thank you exchange rate) but the services you derive from 1st world government abroad is a lot better providing you with a better quality of life.

Paul: a heck of a lot on that answer depends on hour circumstances. I would wager that a middle class south african is better off here. Sure, if you have $500k for a home, and $3m investable assets, you can live nicely. If you need a job to pay for the mortgage and you need to build a retirement egg from age 40, bit tougher. If you are 30 and have a $200k job lined up : go for it.

I’m almost happy that the income tax here in Ireland is so high. If it means not having to throw money down the SARS rat hole.

*lol* NO….the “effective” tax rate in SA is something like 70% as we additionally pay for private services (e.g. medical care & security) that we already pay through our tax for Govt Hospitals and SAPS are supposed to adequately deliver, but don’t.

Paul Kearney’s comment above is spot on. What does your income tax buy you in terms of Govt benefits? (Netherlands, Denmark, Oz, USA even, are high tax countries, almost “socialist” countries…but citizens benefit greatly). Yes, I know even people if UK, US and elsewhere slam their own politicians & “poor” govt…but everything is relative. Just walking down a Dublin street without the risk getting robbed, is such an (unseen) benefit westerners take for granted.

Sadly, SA’s world Rugby ranking is well below that of the 4-clover leaf nation! Well done to Ireland lying proudly second!

Haha, true. If I consider that I’ve had the same phone here since I arrived and haven’t had it stolen, I’ve probably “effectively” paid less tax than SA.

As for the Boks, I’ll still wear my green and gold jersey. It just works out expensive as you need a good few beers after every game to make you forget the performance and start rambling about how they’ve never won the Cup.

Would like to hear from tax experts but the way I see it the CGT exit charge only really becomes and issue if you have significant discretionary investments in your own name. As I understand it: primary residence is CGT exempt (till R4m); investments in RA, TFSA, pension is exempt and not sure how beneficiaries of a trust would be treated but assume no CGT impact?

SARS should stop focussing on people drawing salaries and start looking at all those businesspeople driving R700k cars and staying in R10m houses but submitting tax losses to SARS on their businesses…

You are correct that it is only a significant issue if you have discretionary investments. SA property is not subject to the deemed CGT on exit. Retirement funds are taxed separately so aren’t affected. Beneficiaries of a discretionary trust do not own the assets therefore no deemed disposal.

Much appreciated

Correct SARS! You should be concerned.

You fund a state where the game is to rob Peter to pay Paul.

Peter is trying to hide and you should be worried that the money is going to dry up.

The government continues to establish its credentials as incompetent and vindictive. Worse still its renouncing the promises made at the time of democratic elections. This can never fare well in the long run as the most productive citizens, who also contribute the maximum taxes, will be the first to exit.

Where can you go or what can you do to publicly protest against this type of double taxation? I’m a student and know that when I leave, I won’t want to pay tax to SA if I’m living and working abroad, especially due to the fact that taxes get misused. I will not be robbed of my hard earned earnings.

If you leave without ever working full time in SA you will never have registered as taxpayer in SA so you would not even have to break tax residency. Actual impact of this will be neglible for 90% of expats. Just MW being sensationalist and SARS clutching at straws.

Jip the reality is they don’t skill to control this.
You can simply declare the less than R1million pa and should be ok

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