Residency, tax and regulation
Emigration has been a contentious topic for a while, but with a 22% increase in emigration from South Africa from 2018 to 2019, it’s an even hotter topic these days. This is even more relevant given that many South Africans considering this move turn to their local brokers or financial advisers, not knowing that these specialists probably have little knowledge of the complexities of financial emigration and cross-border tax.
What do the stats say?
The rather quirky term, ‘brain drain’, which refers to the long-term loss of skilled people from a country, is occurring at a 1:8 ratio in South Africa; for each professional immigrating to South Africa, a professional is exiting South Africa. Emigration from South Africa is currently occurring at a rate of 20 people per day.
Should emigration continue to increase at a rate of 22% per year, we can theoretically see the daily emigration rate increase to 66 people per day by 2025.
Of all the emigrations from South Africa 70% of people resettle in the USA, UK, Canada, New Zealand and Australia.
In addition to physical relocation, there’s an increased interest in financial emigration.
Why do South African emigrants want to emigrate financially?
The piqued interest in financial emigration is most likely due to amendments to the Income Tax Act which will go live in March 2020. These changes will see South Africans living abroad taxed on any income above R1 million. The changes also stipulate that, should a South African living in another tax jurisdiction pay less tax in this jurisdiction than in South Africa, the shortfall between SA and foreign tax may also be recovered by SARS should the individual be deemed a tax resident of South Africa.
Financial emigration, of course, is the process of deregistering as a tax resident of your former country of residence; in this case, South Africa. The process does not affect your citizenship, and merely informs authorities that you are no longer liable for tax in the former country. This is due to the fact that South Africa has a resident-based tax system and not a citizen-based tax system.
Once financial emigration has been completed with SARB, the individual’s finances within South Africa will be managed by an authorised dealer via an emigrant capital (blocked rand) account. This account does not allow electronic access or card facilities, but transfers and existing debit orders can be managed via the account.
The Retirement Annuity benefit
Another benefit of financial emigration is that it allows for the withdrawal of retirement annuity (RA) funds from South Africa, provided the person has not retired yet. This withdrawal is subject to the relevant lump sum withdrawal tax and allowable deductions in terms of the Second Schedule of the Income Tax Act.
Normal retirement age is 55 but individuals over the age of 55 who have not yet retired are, however, still allowed to withdraw their RA’s under financial emigration.
How do the residency tests work?
Financial emigration is not always necessary though. Many South Africans have relied on the residency and physical presence tests to confirm that they are not liable for tax in SA.
Ordinarily resident test:
If your home and assets are outside South Africa and you ordinarily reside abroad then you are not ordinarily a resident of South Africa.
Physical presence test:
If you can check yes to all three of the physical presence test stipulations you may be deemed a non-resident of South Africa for tax purposes.
- If you have spent less than 91 days in South Africa in the current tax year, and
- You have spent less than 91 days in South Africa in each of the past five years, and
- You have spent less than 915 days in total in South Africa in the past five years.
Furthermore, if your physical presence test determines that you are a resident of South Africa, but you’ve been outside the country for at least 330 consecutive days, then you are also regarded a non-resident from your day of departure.
Some notable stipulations of the residency tests and financial emigration
Though the above summaries provide the gist of your residency tests, there are a few noteworthy stipulations which may affect your test results:
- A ‘part of a day’ is deemed a whole day. If you were in South Africa for the mere last ten, or first ten minutes in a 24-hour calendar day, then this entire day counts as one day.
- The number of days present are calculated for the fiscal (taxation year) and not a calendar year.
- The 330 days of continuous assessment will always occur and be assessed over a period of two years.
- A natural person spending time abroad, who is ordinarily resident but intends to return to South Africa, is regarded as a resident, regardless of the period of time spent outside South Africa.
- The residency and presence tests may be overruled by the stipulations of tax treaties with other countries.
- Your residency should be settled and certain and not casual or temporary to count for your ‘ordinarily resident’ test.
- Ordinarily resident relies on stricter and narrower definitions of residency, and may include assessments of an individual’s lifestyle as determined by ITC 1170.
- Should you marry someone deemed ordinarily a resident of another country and set up a home with this person abroad, you cannot rely on their ‘ordinarily resident’ status to forfeit your South African residency or bypass the ordinarily residency test, even if you had lived with this person before marriage.
- Where individuals are part of multinational corporations or have other reasons for moving abroad frequently, the burden of proof to appease courts falls on this individual to prove they are ordinarily not a resident of South Africa.
- Financial emigration is not applicable within the Common Monetary Area. South Africans who have emigrated to Namibia, Eswatini (Swaziland) and Lesotho are therefore not eligible.
What if I’m a South African temporarily abroad?
Should the results of the two tests determine that you are a South African, but you are temporarily abroad, your foreign income may be partially exempt from tax in South Africa under section 10(1)(o)(ii) of the Income Tax Act and the determination of a double taxation agreement.
This exemption is subject to additional criteria: as a South African working abroad you need to have spent more than 183 days abroad, of which 60 days needed to be served consecutively, within a 12-month period.
Should you not meet this requirement, you will be liable for tax on your worldwide income in South Africa
When financial emigration is done wrong
There are various reasons why financial emigration should not be attempted without the necessary knowledge and accreditation.
Firstly, uninformed individuals may not be aware of notable exclusions. Though financial emigration determines a disposal of assets for Capital Gains Tax (CGT) purposes, individuals may not be aware that:
- This disposal excludes immovable assets and property which is part of a permanent establishment.
- You are still liable for tax on income generated from a South African source.
- If you return to South Africa within 5 years of financial emigration the financial emigration will be deemed a failed emigration and you will be liable for all tax incurred during the period of the failed emigration.
- Should the wrong procedures be followed, the financial emigration could also take much longer to complete and you may be subject to penalties or auditing.
Talk to the experts!
Rand Rescue is authorised to assist you with your financial emigration and have extensive experience in cross-border finance, including financial emigration, foreign exchange, taxation and the legislation applicable to the respective services.
Talk to us about your emigration needs and let us help you move your financial assets abroad.
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