The three-year rule for tax emigration sticks

Even though there are other ways to test whether people have permanently left the country.
Major cash flow implication: the home in the foreign jurisdiction won't qualify for the R2m primary residence exemption as it's not yet the primary residence. Image: Shutterstock

Many South Africans are lured to foreign shores with the promise of residency through investments in either a business or property.

However, proposed changes to the emigration process – from a bank process to a tax process – could trip up some people’s plans because of the tax cost.

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In terms of a proposal in the Draft Taxation Laws Amendment Bill the single lump sum benefit, prior to the retirement date, will only be accessible if the member of a fund ceases to be a South African tax resident and has remained non-tax resident for at least three consecutive years (hence the three-year rule).

Note, the rules does not apply to all funds (pension and some preservation funds are indeed excluded) but speaks to more than retirement annuities (RAs).

It speaks to RA funds and and certain preservation funds where the member has already made a once-off withdrawal.

Read:
Emigration to be based on tax residency test from next year
Back to the drawing board on pension pot access for emigrantsts

Government has made a policy decision to phase out formal emigration through the South African Reserve Bank for exchange control purposes. The change to a tax process through the South African Revenue Service will become effective on March 1, 2021 with no transitional period.

Despite several submissions to National Treasury by stakeholders such as the South African Institute of Chartered Accountants (Saica) and the South African Institute of Tax Professionals (Sait) to reduce the three years, they seem adamant on sticking to it.

This will have several practical implications for people wanting to emigrate, says Hugo van Zyl, vice chair of the personal and employment taxes work group at Sait.

Cash flow implications

“Younger people need the cash from their retirement fund, not to take out of the country, but to pay the exit tax on illiquid assets.”

Van Zyl says many have bought a property in Mauritius or the UK to obtain residency in the new country. However, South Africa’s double tax agreements (tax treaties), without exception, state that a South African shall be “deemed” to be solely tax resident in the country where the only permanent home is available.

“The moment you meet all the tax resident requirements in the new country and have no South African home available to you, you are deemed to have tax-emigrated and that means that capital gains tax is triggered.”

South Africa has a residence-based tax system, which means residents are taxed on their worldwide income, irrespective of where the income was earned.

When they emigrate it triggers a deemed disposal of all their worldwide assets.

The implications are that they will be paying capital gains tax on the foreign home in either Mauritius or the UK.

They find themselves in the position that they need cash to pay the exit tax, but they cannot sell the property in the foreign jurisdiction, because that is their ‘new’ residency ticket.

Another major cash flow implication is that the home in the foreign jurisdiction will not qualify for the R2 million primary residence exemption because it is not yet their primary residence.

Tax treaty implications

Van Zyl explains that in terms of the SA-UK tax treaty, a South African can be deemed to be tax resident in the UK on the 46th day if they are working there, their family is in the UK, and their only family home is in the UK.

“You are now deemed to be solely tax resident in the UK and the minute that happens the deemed disposal of assets is triggered.”

Once you have sold your property in SA and moved into your new property in Mauritius, you are immediately deemed to be exclusively tax resident in Mauritius. The South African exit tax is triggered on the worldwide assets, including the Mauritius home. In the past the cash from the retirement funds came in handy; the current process does not allow for a deferment of the tax.

Treasury has expressed the view that the purpose of retirement funds is not to fund an individual’s emigration. The tax advantage (tax deductions on contributions to retirement funds) comes with conditions.

Perceived abuse

A reason behind the three-year rule is Treasury’s concerns that South Africans will leave the country for a year and retire from their funds – only to return after the year.

“My view is that they wanted to create some form of certainty with the three-year rule but instead it evoked more political emotions than they intended,” says Van Zyl.

Many South Africans are concerned about rumblings that retirement funds may be forced to invest in certain prescribed assets.

Van Zyl says there really are other ways to test whether people have permanently left the country.

Surely if a family has sold their home and has no other assets in SA it is clear that they have intentionally left. If there still is a huge footprint in SA one can question their motives, he says.

“It is such a major move and upheaval for a family to become tax non-resident [in SA] that we doubt whether there will be abuse.”

Getting your affairs in order

Treasury has indicated that on March 1, 2021 it will be looking at things retrospectively. In other words, people who have been outside SA for three consecutive years will not have to wait another three years to access their funds.

However, that depends on whether they have correctly filed previous tax returns.

Van Zyl advises people to update their tax file to ensure that outstanding returns are filed, that they can provide proof of tax non-residency and that they update their current foreign address and bank account details.

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COMMENTS   18

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This isn’t a big deal really. Of the middle class emigrants I know, many haven’t bothered with financial emigration, and are waiting till 55 to access their retirement savings with fewer penalties. This new regime might make it more tempting for them to access their savings.

It matters if you earn more than R1.25m overseas though to avoid paying the SA taxes. R1.25m now $75k, which isn’t super high in first world countries where people are moving to.

I have never heard of such a thing. What regulation or law states that people who are non-resident have to pay SA taxes? And what does that have to do with retirement savings and financial emigration?

This Guavament cannot be bothered by their effects on people.

All they want are the money to loot !!!

This doesn’t make sense to me, someone please explain.

If as an example,a person retires in July 2021, changing jobs…that person wouldn’t be able to receive their provident/pension lump sum at all? Even if they remain a resident?

Shouldn’t we all be talking about restructuring employment contracts to revolt against this?

Huh? Retirement rules have not changed. The only change is PRE-retirement access to your RA/Provident fund if you moving overseas.

Some individuals who are leaving SA may actually chose to retire form their RA/Preservation fund and leave the living annuity with 100% offshore allocation in SA – then strip out 17.5% a year. This is less tax punitive that the emigration and full RA accesss.

@Zinger. I agree with Charles, it will be less tax punitive to “retire” normally from the RA Fund (or preserver) after 55-age.

This 3 year rule does not affect Saffas remaining in SA. Only meant for emigrants wanting to access Ret Funds prior 55-age.

But then also, if you’re abroad, you have to decide your yourself on what side of the fence to sit. If you state on your SARS returns you’re a SA resident temp abroad, you’ll have to declare your foreign income to SARS, and will be taxed above the R1,25mil (assuming the 183/60-day rule apply re Foreign Income Exemption. At least foreign employer tax paid is a credit. It should only adversely affect Saffas working temp in zero-tax (or low tax) countries like the UAE.

OR…you can motivate on your SARS return “you became non-resident for SA tax”….and then you’ll see the CGT fields ‘kindly’ open for you to declare your “deemed CGT disposal of local & foreign assets”…loosely referred to an one’s “exit tax”.

And MANY formal emigration advisors discuss all the advantages of becoming non-resident (of SA), and then stop short discussion the CGT exit tax.

Thank you Charles and Michael.

Three things.

Cash everything you have in and get it out of this dump ASAP. You can give your SA property away its only worth beer money now anyway.

If you will be around to vote, vote for anyone except the corrupt ANC. Would be so nice to see all these ANC crooks in the gutter.

The third thing is #VoetsekANC!!!!!!!!!!!!!!!

Talk about shooting yourself in the foot…

If the law makers applied the free market principles and governed correctly they would not be afraid of dwindling cashflow.

I use to keep my family in SA and return every 3 months, we spent an average of R50,000 When I came home for a week plus I use to send money home to let them live.
After all the nonsense with tax threats, I sold everything and emigrated my family. In the that friends need help I send money via a voucher like PnP and Woolworths using my credit card.

On the contrary I don’t mind paying even 80% tax provided that the money is well spent and that I have a good life.
Problem is that 30% of taxes are stolen and not distributed to uplift society

Correction — 95 % of taxes are stolen and not distributed to uplift society !!

Did you pay income tax in SA when you were working overseas and returning every 3 months to your family who were based here? If not, then you are the issue.

@charles it does seem that you do not know section 10 of the little SARS handbook. If Purgecoin spent 183 days outside of SA in the year then he DOES NOT have to pay paye tax on his yearly earnings, he is tax EXEMPT. He is not the issue.

@death and taxes. I know it very well. It comes down to an ethical issue. He no longer wants his family to live in SA as under new legislation he would be liable for tax in SA – with a R1.25mil allowance and a credit for any tax already paid in the jurisdiction he is working (so how much tax would he really pay locally?).

So he was happy for his family to live here, possibly your or my neighbor, enjoy the lifestyle in SA, whilst I living next door paid 40%-45% on my earnings and he paid ZERO. Now, that he is liable for tax, he takes his family out of SA and we must all shed a tear cause we losing out on the R50K he sent to his family monthly….

Even if he earned the equivalent of R3mil offshore, his tax liability would be 21% in SA (R615K).

I am not a fan of the current regime and have been externalizing funds for client for over decade, but I have an issue with the above scenario. Every tax paying South African should.

The criminal clique that controls this country is becoming ever more desperate. They are aware that the rich and middle class will flee given any opportunity to leave the failed state. The more well qualified or rich people who leave the dump-the less tax to spend on JW Blue, BMWs etc. But more disturbing is if the criminals cannot continue to buy votes through basic income grants(the poor), AA(the middle class) and tenders(the rich) then they could lose power. So they will implement EWC, NHI, more BEE and steal whatever taxes they can.

Many people simply will take the tax hit to their pension posts when they flee-and with the ZAR inevitably heading for USD 20 in two or 3 years it makes sense.

My view-flee-while you can. Crime, social unrest , the captured SAPS and judiciary make this failed state a very unpleasant place to bring up kids, build a business etc.

They Just ensuring there is something to LOOT!
But thats not going to stop me from leaving.

This was a clever move by SARS/Treasury, from Mar’2021 to hold any already emigrated Saffas to ransom who want to access Ret Funds prior 55-age.

Yes, you may argue the fact (in terms of the Ordinarily Resident definition, with the Phys Presence Test) that you’ve been non-resident (of SA) for a number of years.

SARS will say “no problem, but you haven’t indicated on ANY of your past returns that you became Non-resident. WE HAVE THUS NO RECORD OF YOU DECLARING & PAYING CGT TAX on your ‘deemed disposal of local & foreign assets’ event”.

Yes, you can backdate your date on which you became Non-resident for SA, but very few (yet) have seen the penalty ramifications from SARS…or possibly you’ll get nasty backdated interest on Assessed tax, on the incurred CGT event a few years back.

So you are going to sit with a choice of (and this will depend how large your SA pension fund is, in relation to your global assets): you either will have to declare & pay CGT tax, plus pay SARS the heavier “retirement resignation/withdrawal” table prior 55-age…..so in the end, you may decide that too little capital will be left over (after tax), and the exercise may hardly be worth it.

Or you can assume you’re still SA resident, declare your foreign income to SARS (with the foreign tax credits). I doubt that you’ll end up paying tax in SA (since R1,25m will be exempt), unless if you’re in a country that has a very low or no PAYE tax.
In that case, you’re far better off taking the post-55-age “normal retirement” route…take the 1/3 cash…pay less tax on it, and spread the 2/3 compulsory Living Annuity income over 6-7% years with the maximum 17,5% drawdown rate, by intentionally depleting it…if you have to (just be mindful of higher SA tax on higher drawdown %)

In any case, if you’re under 55-age, and have RA/Preserver Funds, you should NOT be using your retirement capital to fund your pre-retirement lifestyle. The old principle. After all, most emigrants abroad seem to have well paid jobs….so what’s the problem? Continue with your retirement planning as if you’re in SA in leave your ret funds until retirement!

Besides, post-retirement you’ll find that your 2/3 compulsory annuity income from SA (would be the only SA-sourced income) would be taxed here in isolation of other pensions in other countries. (Section 10(1)(gC)(ii). So you’ll likely end up paying little to low “average” tax on your SA living annuity income, and the same applies to the other half of your retirement capital in the other country, be it from Oz, NZ, UK, USA, Canada. Have your retirement income split up between countries, may save you income tax post retirement on the combined sources 😉 Just keep your SA bank open to receive your annuity income in & to transfer funds abroad (or use money-transfer companies)

…and ensure your living annuity’s underlying funds are global/foreign type funds, so that your SA capital is sort-of hedged against a sudden drop in ZAR exchange rate.

And you’re still a “SA tax resident for SARS” if abroad, so you escape the CGT exit tax. Just declare foreign income to SARS, with R1,25m exemption.

You have choices / ways around the problem. Not all doom and gloom. Besides, with an SA in default, just imagine the high interest you may earn on your SA annuity 😉

Chase people away with racist policies and shocking Government and then spitefully prevent them from tapping hard-earned savings! Sounds like the ANC to me.

End of comments.

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