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Financial emigration is the new way out

The taxman targets foreign earnings in excess of R1m – but at what cost to the country?

Financial emigration is on the rise – by 30% over the last two years, according to Claudia Apicella, head of Financial Emigration, a specialist advisory group targeting financial emigres.

The main reason? The imminent change in the law requiring South Africans working abroad to pay tax of up to 45% on any earnings above R1 million. The new rules come into effect in March 2020.

Read: Implications of the change to tax on foreign earnings

“In 2017 the National Treasury and SA Revenue Services (Sars) announced that they would be introducing major changes in the tax exemption on South African expatriates,” says Apicella.

Many South Africans working abroad earning more than R1 million have decided to cut their financial ties with the country as a pure tax relief mechanism.

“Taxing South Africans working abroad is the wrong move,” says economist Mike Schüssler of Economists.co.za. “It may provide a bit of a boost in tax collections in the short term, but at what cost to the country? We are taxing ourselves into poverty and this move aimed at taxing expatriates’ income is going to encourage more people to leave the country.”

Read: The brain drain and SA’s slide to the bottom

South Africans are already over-taxed, handing over 41% of annual earnings above R700 000 (not counting Vat, local government taxes, and pension and medical aid contributions), compared to the US where a marginal tax rate of 38% kicks in at the equivalent annual earnings of R6 million.

We know that roughly one million South Africans live and work abroad, and the number of South Africans applying for foreign citizenship soared 53% in the second half of last year.

Read: Huge increase in demand for second passports

This latest move by Sars and National Treasury to pull South African expats into the tax net is accelerating a brain drain that has been going on for decades. Johannes Wessels, director of the Enterprise Observatory of SA (Eosa), pointed out in a recent Moneyweb article that as high-skilled emigration continues, SA will continue its slide from middle to lower income country rankings. We’ve already slipped by more than half over the last 20 years. With more skilled South Africans headed for the exit door, an already over-burdened pool of taxpayers will have to shoulder more of the tax burden. The only way out of this quagmire is massive job creation.

Source: Enterprise Observatory of SA

Financial emigration requires a declaration that you intend to permanently reside outside of SA, with the formalisation of your non-resident status with the South African Reserve Bank and Sars.

“The financial emigration process is predominantly pursued by individuals earning a surplus of R1 million in foreign income and we find most individuals are between the ages of 25 to 55,” says Apicella.

“Hundreds of thousands of South Africans have left South Africa to pursue a better future. The definition of what a better future entails is relative to one’s circumstances. This has resulted in shortage of skills within SA and will continue to have an impact on the economy.”

The most favourable countries for emigration include New Zealand, the UK, Mauritius, the UAE (notably Dubai), various countries in Asia, Portugal and the US.

Treasury and Sars decided to change the rules governing expat earnings after realising that most SA passport holders and permanent residents who left the country did so without formalising their financial affairs.

Sars now asking ‘innocent’ questions

Sars also stepped up tax audits on those expatriates who left the country and simply decided to ignore their taxes.

Says Apicella: “While some did not consider it necessary to submit tax returns in South Africa, others submitted zero tax returns to Sars. In some cases, individuals even indicated that they were unemployed on their tax returns while earning expatriate salaries.

“While many expatriates may hope that Sars will drag its feet, the 2017/18 South African tax return already included targeted questions dealing with expatriate tax status. The questions may appear innocent enough, but we have seen this trigger an automatic verification or audit process. Where the question is marked false, this is a criminal offense, thus creating an even more serious problem.”

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This article is WRONG and MISLEADING. It is not South Africans ‘working aborad’ / expat’s who will be taxed on their income earned outside of South Africa. It is ONLY South African TAX RESIDENTS. If you have left South Africa and are working (i.e. resident) in the Middle East, for example, you are no longer a South African tax resident, yet you remain a South African citizen. The South African tax system is based on RESIDENCY (previously it was based on a SOURCE system). So only if you are a South African (tax) resident will you be taxed under the current proposal. All the South Africans working permanently in the UAE, for example, need not be concerned. It is only people who are resident in South Africa for tax purposes that will be impacted. CHARLES ARNESTAD CA(SA), CFA.

Fully agree with this comment! I was about to say the same.

Note that financial emigration on the up because we have people giving wrong advise.

Added to that comment; there is a social contract to you paying taxes – it is what is due by you to run the country. If you are not using the country’s services (hence, not resident) you should not be taxed.

Best thing to do (if you have an entrepreneurial spirit) is form you own business (I’m talking for the USA now) and load up on assets like cars etc, expense your costs to the COMPANY (Use credit card for everything in company name) – pay less local (USA) tax and report even lower revenue to SARS – 100% LEGIT. I learned so much in the USA from the biggest crooks in business.

@Etienne; you are correct about the social contract. But here’s the moral challenge, If the expat intends to return to SA, who pays to keep the place (SA) running while he or she work overseas and ready for when he or she returns to enjoy it? There is a moral argument to make that expats should contribute something towards their country where they will be returning to.

Not sure how anyone can permanently be in the UAE – as you aren’t allowed to settle there without a specific working visa, it might be tricky to suggest you have left SA for good.

No they are leaving because they pay too much tax and get too little for it! Government has never thought of bringing down tax rates to save the economy, always up, no investors left to create jobs, alla Venezuela!!!

Charles,

You are partly correct. South Africans that work in UAE are not necessarily foreign tax residents. If Johnny works on oil rigs off in middle east but wifey and the three kids live in and go to school in Randburg : Johnny is an SA tax resident no matter whether he has worked there 5 years and is only in SA for a week a year.

YES, agreed. I am referring to South Africans who work / live in the Middle East ‘permanently’ as I stated in my comment, i.e. those who have built a life outside of South Africa. Otherwise, if their main residence is in SA and the kids go to school there, they will, more likely than not, be considered a South African TAX RESIDENT and have to pay tax.

Do you know if under this new ruling that your “subsistence allowance” will be taxed? If ones taxable income on their IRP5 is R1,200,000 and their non taxable income (subsistence allowance) was R300,000. Would you then only be taxed on the R200,000 (over the R1m threshold) or will you now be taxed on the R500,000 (subsistence added)

Charles Etienne
You guys seem to know a lot – please assist with a family argument:
My brother lives in SA as do his second wife. He is retired but have all assets in SA.
If he (or his Trust) invests – legally – outside of SA and these investments show returns greater than ZAR1m
Are these taxable only above the threshold?

@Illphil If you live in SA then you are a tax resident, so ALL your income is taxed, irrespective of the origin of it.

@Illphil. I agree with comment from “The Hun”.

The R1mil “expat tax” exemption relates to relief on income tax, for “SA residents working temporary abroad”. Nothing to do with offshore investment returns (will be taxed on interest, dividends & CGT gains…exactly like local investments, except without the R23K/R34K annual interest exemption.)

Your brother (or his trust) is locally domiciled, hence subject to normal SA tax rules.

At least the foreign interest is not as high, compared to local interest-bearing accounts. And the currency CGT-gain could be to his advantage.

(…there is another R1m per annun rule, which is the local “single discretionary allowance” where SA taxpayers can transfer funds abroad without SARS tax clearance. Or R2m between married spouses, per annum.)

If the trust is offshore and was created with non-SA funds, ie inherited from a non-Saffer or earned before the new rules, then distributions from a non-resident trust should be tax-free in SA.

If the offshore trust was created with funds from SA, bad luck.

Could not agree more. This is the third or fourth hysterical article that MW has published on this topic this year. I would urge any person considering financial emigration to speak to a tax professional or even SARS.

Apart from the residency issue, if you are in a country with a double tax treaty with SA you are also possibly excluded or at the very least will qualify for a tax credit somewhere.

One has to question if MW is getting some kickback from these “consultants” making a fortune “advising” people on financial emigration.

Oh’ how wrong you are! please explain your status as a “CA(SA) CFA” if you cant even properly read tax amendments properly!

@frikkieo – Let’s Agree to disagree and see who is proved correct. And, by the way, what are your qualifications?

It may be important to find out what the DTA between RSA and the country you think you are “tax” resident in has to say about residency. E.g. the DTA between RSA and Saudi Arabia states in article 4:
“…the term “resident of a Contracting State”
a)any person, who under the laws of the Contracting State, is LIABLE TO TAX THEREIN by reason of that person’s domicile, residence, place of management or any criterion of a similar nature…”

Now in Saudi NOBODY IS LIABLE TO TAX. No taxes are levied. This probably means that no expat can be a resident of Saudi??

Nearly every new law and rule has unintended consequences, often far worse than the ones the new law tries to correct, from prohibition in the US to rabbits in Australia. It is logical that everybody tries to minimise his taxes and if financial emigration is the solution I can see no reason why one should not do it. If a SA citizen working outside the country can find a place of residency where he pays less tax he should do it. Later when and if he wants to return to live in SA nothing prevents him from doing so. According to the constitution one can not lose SA citizenship, and citizenship allows residency.

Your citizenship to SA will become null and void in the event you want to become a dual citizen and your application to SA to keep your citizenship in that circumstance is denied and you proceed to become a citizen of another country.

It is not a guaranteed right to have citizenship.

Etienne, please provide a reference to the source for your statement?
It seems to clash directly with section 20 of the Constitution.

@Etienne I am a dual Hungarian/SA citizen. I am Hungarian by birth and have been living in SA for 50 years. After 5 I became a citizen. I have the right to residency in both countries and currently have the right to both passports. The SA constitution in Chapter 2 Bill of Rights, section: Citizenship, point 20 states: No citizen may be deprived of citizenship. During the communist years I could not get a Hungarian passport but officially I was still a citizen. Officially I can not even give up my Hungarian citizenship, even if I make a declaration of giving it up Hungarian law still treats me as a citizen. Only the Hungarian parliament can take it away in very exceptional cases. Having two passports is different from having two citizenships. Lot of countries allow dual or even more nationalities but allows only one passport.

We left in 2000 and became Canadian citizens in 2005. We let the High Commission in Ottawa know and received a letter to acknowledge our dual citizenship. Never formally emigrated at any stage. We now travel on two passports. I am still an SA citizen and we have had no issues so far including renewing our SA passports. I would be very interested for a reference to this info as well. In the mean time I’ll do what I learned in the army: I don’t volunteer information. Never. Catch me if you can I say.

This is true. There is no “right” to citizenship, and South African Home Affairs is quite Xenophobic. If you emigrate, obtain citizenship/passport of another country – good luck coming back. Not so easy. You will have to APPLY for permanent residency again, and it’s not so easy. My advice – never give it up. Limit your interaction with Home Affairs – it will take years off your life

Etienne – you are wrong.

I have 3 passports (UK, Irish and SA) and I’m a citizen of all 3 countries. No problem. I have to enter and leave SA using my SA one but they have no problem with the fact that I never have an entry / exit stamp for where I go to (as I use the UK / Irish one) – it is totally legal.

@Sync. It would be morally correct for those using the facilities of the country- anything else is termed as extortion which is not moral in any sense of the word.

The country is fundamentally broken on the user pays principle.

The constitution says that no citizen may be deprived of citizenship. It doesn’t say “no citizen may be deprived of citizenship of South Africa”.

It is to prevent people from being made stateless. On the other hand if you acquire citizenship of another country and lose your SA citizenship because you didn’t apply to retain it, you are not being deprived of citizenship, since you have taken on another citizenship, thus not contradicting the constitution.

This is my experience with dual citizenship. I checked this directly with the SA High Commission in Canberra. There is no issue holding duel citizenship. If however you do not apply to the High Commission to retain your SA citizenship prior to obtaining citizenship in a new country you AUTOMATICALLY lose your SA citizenship. Many people that did not know about this have been caught out. It may not be logic or constitutional, but this seems to be the way it works currently.

I followed up with a Citizenship Status Determination Application and was duly informed that I have lost my SA citizenship due to not having applied for the retention prior to becoming an Australian. They do state in the Determination letter that you retain residency rights in SA though.

@Etienne – no problem if you have always had citizenship (by birth) or if you acquired it before the law changed. Agreed it’s best to get approval if you are picking up new citizenship now – but there’s no indication that it would not be granted.

The fact remain all this government is good at is trying to get a slice of someone else’s pie. They have no ability whatsoever to create their own pie. The thinking is only along those lines.

It’s not as if we have much of a choice, the way things are going in SA. The other ‘financial emigration’ that is being done, is to move your money out of the country. I’ve decided to buy shares in overseas companies to accomplish this, but am finding it difficult. First problem is finding a broker who can buy actual shares (not unit trusts or CFD’s) on an overseas stock exchange at a decent cost. Second problem is whether it should be done via an overseas bank account, or from an SA account. The one thing I do know is, even if I’m residing in SA, my money shouldn’t, until we have sorted out our loooong list of problems. It is disappointing that SA citizens can’t leave their hard earned money in SA, where it is becoming worthless in double quick time.

The article should remind people that financial emigration creates a CGT event from the date thereof (on your worldwide assets!) – which might have been ages ago, and thus incurring interest and penalties too.

It appears that there is a plethora of fake news published around this topic, causing more confusion than clarity. Moneyweb could assist its readership greatly by requesting a credible and qualified professional to provide a simple, summarized article on the implications of this intended fiscal event, and less sensationalism.

So can someone who really knows please help me out here.

I work offshore and have a rental flat in the town where I work. My gross income for my offshore employer is say R1.5million. However, my rental is R0.4 million per annum.

What will SARS use as income in the new offshore “income” scenario? R1.5 or R1.1 million. What about the airfares and other travel to get from SA to offshore?

If I was in SA and had to travel from my home/residence to my place of work I could not claim travel costs. However if I travelled to say Durban from Joburg I could claim these costs plus accommodation while in Durban.

What is the difference other than the destination?

Looking forward to some excellent responses.

Thanks

How long do you spend in SA? do you have a property here, family here, a dog here?

You need to consider the Ordinarily resident test. If you do not meet this test, then you are not liable for tax in SA. If however you are ordinarily resident in SA, then you would be taxed on anything above R1mil – HOWEVER you can use the tax already paid as a tax credit.

If you don’t pay any tax in the jurisdiction you work…… then beers on you!

So much BS in this article it’s not funny.

Fact is that if you are non-resident in terms of the ITA then this change in legislation does not affect you one iota as far as liability to SARS is concerned other than sourced-based income.

This will be the position where:
a) you are deemed exclusively resident in another country under a DTA;
b) you fail the ordinarily residence test, and, if so,
c) you fail the physical presence test as well.

Financial emigration has nothing to do with tax residence – you can be non-resident for tax but resident for excon purposes, and vice versa.

It is this kind of obfuscation by companies that rely on financial emigration for their livelyhood that confuses people on the differences between the concepts.

SARS’ own interpretation notes clearly state that one is to avoid confusing these concepts.

Lastly, if you become non-res for tax purposes, whether by way of FE or not, this will trigger an exit CGT event.

This article and the bulk of the comments (except for this one) are significantly factually incorrect. Financial Emigration has nothing to do with where you are tax resident, and being tax resident in another country does not mean you have Financially Emigrated and vice versa.

Moneyweb – it is up to you to take this article down and replace it with one that has factually correct information – what happened to not spreading fake news?

The key issue here is tax residency, where you can emigrate and hope that SARS doesn’t attacked you for being ordinarily resident in SA, or you can formally apply to have your tax residency changed, which will trigger a deemed disposal on all your assets and will be liable to pay CGT above the base cost of your assets at the applicable rate (individuals/ trusts)

Article content somewhat misleading.

“Financial Emigration” is a SA Reserve Bank process (in case you want to transfer all your assets out of SA, from the life assurer and then via your bank). This is alos the only option for Saffas under under 55, who is leaving SA, to get their retirement funds out of SA that is locked up in RAF’s, employer Pension or Provident (and Preservation) funds…i.e. “compulsory” savings in assurance speak.

To become a “tax resident” of another country (where you will no longer be liable to tax in SA…EXCEPT for the final deemed CGT disposal on your local & foreign discretionary assets…informally known as your ‘exit tax’), the “financial emigration” route is NOT a requirement, however it could be ONE OF the indications (to SARS) that your intention is to live abroad on a “settled and certain” basis. Only ONE indication, but there are others to satisfy SARS.

Tax residency (nothing to do with citizenship) centres around the SARS (primary) “ORDINARY RESIDENCE TEST” (includes factors e.g. where your sphere of ‘vital interests’…like the rest of your family..is located; your long-term intention must be settled and certain, etc.)
If the “ordinary residence test” is not conclusive, one can fall back on the (secondary) “PHYSICAL PRESENCE TEST” which works on the number of days spent in SA over a 5-6 yr span.
In many cases, where a SA tax resident is working & living abroad for more than 330 continuous days, you may have broken SA tax residency already (with or without Fin.Emigration)

But then again, if already emigrated, the CGT exit tax needs to be declared to SARS sooner or later, otherwise this may catch up with you.

The notion of “financial emigration” is possibly milked by vendors, stating the Fin Emigration is the only route to take, which is a half-truth. Use if mostly if you want the life assurer to release your RA/Pension fund. Will need SARS Emigration tax clearance…where SARS will want your assets & liab for the past 3 yrs, etc, and the bank’s MP336 form.

Coming to investments/life-savings: many emigrants are hell-bent to externalise all their “compulsory” savings, along with “discretionary” funds. The fear is always “what happens to my compulsory ret savings in SA? with hanging issues of expropriation or prescribed assets?”

(you can still take R1m of ‘discretionary’ funds out of SA, per spouse/taxpayer, per annum, without SARS clearance. Aka the Reserve Bank’s “single discretionary allowance”. Like after selling your house. This applies to SA residents (without fin.emigration).

The problem is, if you want to withdraw your compulsory ret savings (before 55 age) you will in any case LOSE about a third of your capital of your compulsory funds, to tax. That’s a known. (based on SARS ‘resignation’ withdrawal table, where the 1st R25K is exempt)

What is LESS known, is the potential impact of prescribed assets on your ‘compulsory’ funds. If you believe the impact will affect say 10-20% of your fund, then leave it in SA, and draw upon if as a foreign pension. Why sacrifice a third of your ret capital now?

Usually, a foreign pension (becoming from within SA) will be tax-exempt in another country, as PAYE tax would be deducted in SA in any case (at a very low rate, if you do not have other income running alongside it to push marginal bracket higher). Then when abroad, start building up the other half of your ret savings, and then you have ret savings split between 2 different countries, the combined tax on retirement income should be lower coming from 2 sources and not thrown into one pot within a single country.

You can still be a tax resident (i.e. emigrated) of another country, WITHOUT doing Fin Emigration in SA (unless if you want to move all your comp ret funds out of SA, and immediately lose a huge chunk of capital due to PAYE tax). Make then sure your SA ret funds that remain behind are mostly in rand-hedge type underlying funds to protect against ZAR depreciation, and some high-interest income-funds).

Food for thought.

(I’m an Individual’s tax consultant for the past 15+ yrs, and worked prev in the life ass industry…hence have balanced exposure to both tax implications and the investment world. The above merely my opinion. Others may differ.)

The ANC at work again. Chasing rich people away!!
People are fleeing the sinking ship. 2nd passports being sold for Portugal, Malta, mauritius , Lithuania etc. the rich and clever and young are leaving the empire of Zuptaland with a45% marginal tax rate, VAT at 15%, tax on fuel, imports etc and broke SOEs etc.

(@Etienne; you are correct about the social contract. But here’s the moral challenge, If the expat intends to return to SA, who pays to keep the place (SA) running while he or she work overseas and ready for when he or she returns to enjoy it? There is a moral argument to make that expats should contribute something towards their country where they will be returning to)

I disagree entirely with the above opinion. Whilst in a civilised country taxation may be useful in order to afford the social costs such as schools and health care, in RSA a huge percentage is wasted or stolen. Paying tax here means you are party to that. Rather save your money.
Taxation is theft from hard working citizens.

You have a government that is broke you have businesses closing and tax payers not working and paying tax anymore. So as in most socialist countries they will continue to extort the money (more & more) from the few left working. They are going to tax you to death !! Get ready. You have been warned

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