Emigrating? What to know before you go

This article was originally published on The Daily Investor.

What does “residency” entail?

When you think of “residency”, you probably think about where your permanent home is. This is a type of residency as defined by Home Affairs, but there are really three separate types of residency that can change when you leave:

• Your home and physical movement, according to Home Affairs
• Your tax residency, according to SARS
• Your residency for exchange control purposes, according to the Reserve Bank

If this sounds overwhelming, don’t worry. Here’s what you need to know.

Tax residency and tax emigration

South Africa has a residency-based tax system, which means that you’re taxed on worldwide income if you’re considered to be a South African tax resident. This means it’s possible to physically leave South Africa and still owe SARS.

To ensure that you break your tax residency you need to:

• Cut ties to South Africa – your spouse and children need to no longer be in SA, you also shouldn’t keep your belongings in storage in SA, or have the majority of your assets still in SA
• Ensure you spend no more than 90 days in South Africa in the tax year that you leave (this is especially important to bear in mind if you plan to enjoy the “swallow” lifestyle going forward)

If you are able to demonstrate to SARS that you are no longer physically present in SA and SA is not your ordinary residence, then you can undergo tax emigration. This will inform SARS that you are no longer tax resident and you therefore don’t owe tax in SA on your foreign income.

Bear in mind, however, that any SA-sourced income will still be taxed in SA and you will need to complete a tax return for this income, even once you break your SA tax residency.

Expat tax and double taxation

All South African tax residents must submit tax returns in SA, but you might not owe tax to SARS after you leave. There is a special exception for South Africans working outside of the country. If you have spent 183 days outside of the country in the relevant 12-month period (at least 60 of those days being consecutive), then the first  R1.25 million earned in foreign employment income is exempt from South African tax. Other income, such as foreign rental income or gains, remain fully taxable in SA.

South Africa also has Double Taxation Agreements (DTAs) with a number of other countries which aim to ensure that you’re not taxed in both South Africa and your new country when you are considered tax resident in both countries. However, just what these agreements entail varies from country-to-country and not every country has such agreements with SA. It’s worth getting advice from someone well-versed in cross-border tax to find out exactly what your tax situation might look like in your new home. 

 Capital Gains Tax

When you break your tax residency through tax emigration, SARS will trigger a Capital Gains Tax (CGT) event as if you sold off your worldwide assets. This is often called “exit tax”. There’s some confusion around exit tax and what many people don’t know is:

• Exit tax may be due immediately when you leave, not at the end of the tax year.
• South African CGT isn’t a flat rate but is dependent on your taxable income for the year. Therefore, you will pay more exit tax if you leave late in the tax year.&
• If you don’t pay exit tax when you leave, SARS may change the laws in the future and you’ll have to pay based on your foreign assets at a later date – which could work out much pricier.
• SA immovable property is excluded from exit tax.

Don’t let the exit tax come as a shock. Ask a South African cross-border tax practitioner to help you work out when and how much to pay so you can plan ahead and incorporate it into the cost of immigrating.

Exchange control

As mentioned earlier, the South African Reserve Bank also keeps track of your residency. South African exchange control residents are allowed to transfer up to R11 million out of the country each year. The first million is part of a “single discretionary allowance” (SDA) and you can transfer this without requiring tax clearance. Only the remaining R10 million “foreign investment allowance” (FIA) requires an Approved International Transfer (AIT) from SARS.

However, when you tax emigrate your SDA falls away, so it's best to use it before you tax emigrate. If your tax emigration is dated for the current year, you can use it for the rest of the calendar year. However, if your tax emigration is backdated to a prior year, your SDA will fall away immediately. Once your SDA has fallen away, you will need to apply for an AIT to transfer any funds out of SA (that don’t form part of an annuity income).

Financial planning considerations

Tax residency will also impact your financial planning. Many of the plans and structures you have in place will no longer suit your new circumstances. For example:

• Endowment policies provide tax benefits for certain SA tax residents in the way they’re structured and taxed, that may not apply once you leave.
• South African retirement policies are limited in their offshore exposure. They may be encashed in full after three years of non-residence, or retired from and exposed offshore.
• Dividends and interest may benefit from reduced withholding tax rates under DTAs. 
• You may also be double taxed on unit trust investments and shares portfolios when you sell, as some countries don’t offer rebasing of capital gains (so you’ll pay when you exit SA and again when you sell).
• If you have an interest in a family trust, you may face higher tax rates when non-resident. Some countries may also impose punitive tax rates on trust distributions (and some do not recognise trusts either).

It’s essential to start making changes to your financial plan well in advance of leaving the country as sometimes it’s too late to take action once you are tax resident in a new jurisdiction. 

Unsure about your tax status after you’ve left South Africa? We can check your tax status with SARS to ensure there are no admin penalties due and determine the best way forward for you based on your unique situation.

Our South African tax team works hand-in-hand with our wealth advisers and forex department to offer you specialist, personalised, end-to-end advice. Speak to our team at taxsa@sableinternational.com or by calling +27 (0) 21 657 1517