Financial emigration vs tax emigration – understanding the difference

This article was originally published on BizNews

Moving abroad does not necessarily mean that you are no longer tax resident in South Africa. As a tax resident, you are still required to submit tax returns to SARS and may be liable to pay tax on your worldwide income. Additionally, as of March 2021, expat South Africans can only access and transfer their retirement annuities offshore if they can prove they have been non-resident for tax purposes for over three years. Failing to complete the tax emigration process can result in unexpected penalties and delays, but many South Africans remain unaware that the process has changed.

Financial emigration explained

Financial emigration was the process that expat South Africans used to officially declare themselves non-residents of South Africa with the South African Reserve Bank (SARB) for exchange control purposes. The main benefit of this process was that it gave expats the freedom to encash and transfer their retirement annuities and pensions offshore. This process could be used as an indicator of intention to change tax residence. As this was a process with the SARB, it had no impact on your tax affairs, which resulted in some confusion.

Now the question of whether an expat is resident or non-resident of South Africa instead falls solely under the purview of the South African Revenue Service (SARS). In some cases, this simplifies matters. However, when it comes to transferring your RA offshore, things are now a little more complicated.

Accessing your South African retirement annuity abroad

In order to transfer retirement annuities out of the country, South Africans must now prove that they have been non-resident for tax purposes for three consecutive years. This is known as the three-year rule, which states that members of pension funds who emigrate must wait at least three years before claiming their pre-retirement lump-sum benefits.

South African tax emigration explained

The term “tax emigration” is sometimes used interchangeably with “financial emigration” to mean encashing your retirement fund. However, tax emigration specifically refers to the changing of your residency status with SARS when you leave the country permanently.

It is important that you carry out this process as soon as possible after leaving so that you can access your RA after the three years have passed.

Additionally, not tax emigrating puts you at risk of penalties for failure to submit and pay tax owed to SARS.

South Africa has a residence-based tax system. This means that anyone who is considered a tax resident is liable to pay tax on their worldwide income. If you are living outside of SA, foreign income up to R1.25 million is exempt from SA tax, but penalties may apply if you do not submit the required returns to SARS.

See also: Emigrating from South Africa? Here’s your ultimate tax emigration guide.

Determining your tax residency status

Tax residency in South Africa is determined by two tests, namely the Ordinarily Resident test and the Physical Presence test, which are conducted by SARS. You can only tax emigrate if you’re determined to be non-resident.

Ordinarily Resident test

The ordinarily resident test considers your permanent home, where you keep your assets and where your family is based, for instance:

• If you have a permanent home in South Africa
• If you live in a place in South Africa with some degree of continuity
• If you regularly return to a location in South Africa
• If you keep items in storage in South Africa

In the event that you are declared ordinarily resident outside of South Africa, SARS will take into account the amount of time you’ve spent in the country.

Physical Presence test

To be deemed a non-resident for tax purposes, you need to be physically present in South Africa for no more than the following periods:

• 91 days in the year of assessment
• 91 days for each of the five years preceding the assessment
• 915 days in total during those five preceding years of assessment – an average of 183 days a year

How to tax emigrate

There are three ways to change your tax status:

• On the tax return that you submit to SARS
• On the RAV01 form, where SARS will open a portal for you to upload the supporting documents
• The RAV01 is an online form that allows you to make changes to legal entity details at a SARS branch or via eFiling

SARS Non-Resident Tax Status Confirmation Letter

A SARS non-residency tax status confirmation letter confirms that SARS has agreed that the individual has ceased to be a tax resident of South Africa, including the date tax residency was ceased.

In order to apply for the SARS non-residency tax status confirmation letter, you must have already completed the tax emigration process through SARS. If you are deemed to be a non-resident of South Africa for tax purposes, you only have to declare and pay tax on income earned in South Africa.

Note: The letter is not always issued automatically and you may need to apply for it. It is worth doing so, so you have proof of when you changed your tax status on hand should you need it.

South African Capital Gains Tax (CGT) and “exit tax”

You should be aware that when you change your tax residency, you will trigger a capital gains tax (CGT) event, where you will be liable for tax on your asset base (with some exceptions) as if you’d sold it while living in South Africa.

On the day you change your status, you may also have to make a provisional tax payment as all taxes will be due immediately on the deemed sale of your worldwide assets, even if the tax year has not yet ended. It’s also important to note that your primary rebate for the tax year in question will likely be prorated.

Before you tax emigrate, Sable International can help you calculate and prepare for the amount of tax you will have to pay.

Penalties for not tax emigrating when you leave South Africa

Countries report to each other and share data to prevent tax evasion and money laundering. This means that SARS is likely to discover if you’re tax-resident and not submitting the required returns, even if you are unaware yourself. If they do, they will levy administrative penalties either because of income you should have disclosed or because you have not changed your tax status.

SARS’s Voluntary Disclosure Programme currently allows you to admit your non-compliance to SARS before they discover it and avoid these fines. Even if you have lived outside South Africa for years without having tax emigrated, you may still be eligible for this programme.

A tax professional can help you prove the date you left South Africa so that the CGT you owe is based on the assets you had at that time, not your current assets. This is called “backdating” a tax emigration.

It is widely speculated among tax professionals that SARS intends to abolish the possibility of backdating a tax emigration. If this happens, your tax emigration will only be valid from the date you declare it, and you will have to pay capital gains tax on your current assets, which may be worth more than when you left South Africa if you have lived abroad for a long time.

Changes in tax status are complex and require a lot of administration on your part. With professional cross-border tax assistance, your tax affairs will be handled smoothly. Sable International’s tax experts can advise on all South African tax matters and can assist in managing the entire process. Email us on taxsa@sableinternational.com or give us a call on +27 (0) 21 657 1517 (South Africa).