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.
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.
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.
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.