Tax Rules, Regulations And Directives For South African Emigrants
Let’s be honest – when most of us hear the word “tax” it fills us with dread. And it’s not necessarily because we don’t want to pay our dues, but understanding what our rights and obligations are and not unwittingly stepping over that line to the wrong side of the law is not always that easy.
It’s therefore completely understandable that South Africans who have emigrated might be even more apprehensive about taxation.
Rand Rescue takes a look at the some of the tax rules and regulations you should be aware of as a South African expat.
It would be impossible for us to cover the ins and outs of international taxation in a mere blog, but hopefully we can give you, as a South African living abroad, some insights into this complex system and the regional disparities you should be aware of.
What is tax and where did it start?
Taxation started in ancient Egypt with scribes assigned as tax collectors for the Pharaohs. This first revenue system was applied to a single agricultural by-product – cooking oil. Scribes would “audit” households to monitor the consumption and repurpose of cooking oil and ensure that all citizens paid their oil tax.
The taxation system later flowed over to Greek civilization where the Athenians used tax called “eisphora” to fund wartime expenditure. This tax was rescinded during non-war periods and citizens could even count on refunds – provided their leaders had “plundered” enough during war to provide citizens with these refunded resources. The Greeks also imposed the first “foreigner” tax on individuals of foreign nationality.
Taxation was further expanded and elaborated on by Caesar Augustus in Rome, who started import and export taxation as well as inheritance taxation to provide retirement funding for the military – tax was levied on all inheritances except gifts to children and spouses. The Romans also imposed sales tax and their tax system was transferred to England during the Roman occupation.
With the fell of Rome, however, it was the Saxons who first imposed tax on land and property and the first income tax was imposed on the wealthy exclusively.
Essentially, income raised through tax had been utilised throughout the ages to foot governmental bills – although often coming under fire for its use in war, taxation is of course aimed at benefiting communities through service delivery.
How does tax differ across the world?
Of course, not all regions adopted such revenue systems, and most countries have adapted tax protocols to suit the unique political, social and economic needs of the country in question.
Though there are tax havens around the globe, very few people deliberately move to a region due to its tax policies – but nevertheless, it is incredibly important to understand the differences in taxation around the world.
One of the more confusing parts of taxation concerns the treatment of income and expenditure across country borders. It’s certainly not that complicated to calculate your taxes when you have clear formulae provided by the revenue service, but when these formulae differ or when tax levies are applied in different ways in different jurisdictions it is hard to figure out what to do.
It’s therefore understandable that South Africans often dodge their obligations OR lose out on opportunities. Many expats view their tax back home as an “out of sight, out of mind” deal and deem it unnecessary to pay further notice to SARS. Others, pay their taxes dutifully and leave their money alone, afraid to take any chances. Both these individuals could get a rude awakening at some stage.
South African tax
South Africa’s tax rates for individuals fall between 18% and 45% based on one’s individual income, a flat rate is levied for on all income exceeding R189 8811 per annum after which the required tax rate is levied on any income exceeding the respective thresholds (2016 – 2017 tax rates).
Companies can look to pay between 28% and 45% based on the type of business, corporation or trust. There are additional taxation rules on capital gains, interest and dividends, international travel and medical tax credit, but the taxation of retirement funds is undoubtedly one which is of utmost importance for saffas abroad.
South Africans are offered tax relief on lump sum retirement fund withdrawals preceding their retirement – but there’s a catch: once relief on a withdrawal has been claimed it cannot be claimed again and you will be liable for tax on further withdrawals. These tax rates fall between 18% and 36% with additional flat rates due on withdrawals exceeding R114 300. Flat rates are levied in most brackets before the taxation rate is applied to amounts exceeding certain thresholds.
Taxation of lump sum claims following retirement, death or severance also fall between 18% and 36% but the thresholds are much higher. Tax is only levied on amounts exceeding R500 000 and flat rates are only applied on lump sums exceeding R700 001.
Of course, this is just the gist of it, as taxation differs between individuals based on their income, sources of income, type of employment, their individual financial portfolios and so forth. And if you’ve relocated abroad it could be rather tricky.
South Africa compared to the rest of the world
But how does South Africa compare to the rest of the world? Well, South Africa has an average taxation rate compared to other countries. As of December 2016, the highest tax rates were 60% levied in Chad and Ivory Coast, while the lowest was 7% levied in Guatemala. This excludes the countries or regions where no tax is levied such as: the Bahamas, Bahrain, Bermuda, Brunei, the Cayman Islands, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. (It’s important to note that these countries only preclude personal income tax, but still charge taxes on certain business transactions/incomes, imports and exports and so forth).
On the income tax scale South Africa’s highest tax rate of 45% is on par with Australia, the UK, China, Spain and Taiwan. But of course, one cannot look at the tax rates in isolation as the income brackets to which these rates are applied, the cost of living as well as the GDP of the individual countries and other factors should be considered if one is to make a proper comparison. Furthermore, a valid point for consideration is how well the respective governments fare in utilising tax for their citizens and businesses. It’s therefore not simply a matter of how much tax you will pay, but whether your money would be put to good use.
Double taxation agreements, exemptions and possible changes to come
Double taxation agreements are agreements between two jurisdictions which exempt citizens who operate in both jurisdictions from being taxed on income in both countries. This applies to citizens of a country working abroad for a set number of days (as well as a set number of consecutive days), those who earn a passive income in a different jurisdiction (such as rental properties) as well as emigrants who have not formally emigrated.
South Africa has double taxation agreements in place with the following jurisdictions:
- Democratic Republic of Congo
- Sierra Leone
- China (People’s Republic of)
- Czech Republic
- Hong Kong
- New Zealand
- Russian Federation
- Saudi Arabia
- Slovak Republic
- United Arab Emirates
- United Kingdom
- United States of America
Of course, since many Saffas abroad are either unaware of such tax relief available to them or ignorant of their tax obligations to both jurisdictions, many people don’t claim this tax relief and don’t request refunds on the taxes they’d already paid.
For pension and annuity income, South Africans must submit an RST01 application to SARS who will instruct the service providers with whom the annuities or pensions are held to cease further tax deductions on the relevant policies – this submission needs to be made annually. If you want to claim a refund on tax already levied on these policies you must also submit an RST02 application to SARS who will then refund the relevant money due to you.
A Double Taxation Agreement could also see you get tax relief on the withholding tax on interest rate (currently 15%), taxes charged on lump sum payments and could possibly see you pay lower tax rates based on difference in tax rates between two countries.
Possible changes in future
Although DTAs are aimed at offering South Africans relief on double taxation, the Treasury has made it clear that it’s not aimed at exempting expats from all tax obligations. In his budget speech earlier this year, Pravin Gordhan had introduced his Annexure C proposal which aims to address the issue of tax evasion. The proposal will specifically address qualifying criteria for the 183 rule (Section 10.102). If approved, South Africans living or working in tax havens will be liable for paying tax on their income in South Africa in future.
The other alternative: formal emigration
Formal emigration, also known as financial emigration, is one way you can simplify the taxation process. South Africans who apply for formal emigration still retain their South African citizenship and passport rights, but once the process has been finalised, they are no longer viewed as tax residents of South Africa and therefore no longer liable for taxation on their foreign income.
Furthermore, formal emigration also allows for the repatriation of retirement annuity proceeds. Many South African emigrants believe their retirement annuities in South Africa to be untouchable – and the same goes for pension, provident and preservation funds where a lump sum withdrawal had already been made.
As an expat, however, you can transfer the proceeds of all these policies abroad provided you follow the correct procedures.
If you’ve already made a lump sum withdrawal on your pension, provident or preservation fund, you would not be able to withdraw further funds before retirement (age 55). You are, however, allowed to transfer these funds to a retirement annuity. And although you would not be able to withdraw the funds of your retirement annuity before retirement age as a tax resident of South Africa, you may do so once you’ve formally emigrated.
You will still be liable for tax on this withdrawal, but many South Africans have found the repatriation of retirement funds offers several benefits, such as:
- Earning interest in a stronger currency with reinvestment in the new country
- Administrative ease of having your funds in local accounts or policies
- Benefiting from retirement or pension incentives such as the UK pension incentive scheme or the lower taxation on Australian superannuation funds.
- Side-stepping the risk of currency exchange fluctuations.
Let Rand Rescue move your money abroad
Rand Rescue offers a range of financial services to South African emigrants. We have a 100% success rate and offices across the globe with specialists able to assist you with the transfer of your funds to your new home.