Tax and investment planning for emigration

Tax and investment planning for emigration

In this newsletter, we tackle some important and difficult-to-understand financial issues regarding emigration, our obligations to SARS and how to invest now if you’re planning to emigrate.

Planning to Emigrate

I plan to emigrate from South Africa; how should I be investing?

Everyone’s financial plan is unique and requires a lot of thought to ensure that decisions taken today will not result in negative financial effects in the future, such as unwanted restrictions on capital and tax liabilities.

Investors can continue to invest in South Africa if they plan to move abroad in the future, but investors must be wary not to lock their money into any products that will not suit their long-term needs. Retirement annuities are tax efficient for SA residents, however these funds are not easily accessible after emigration and cash withdrawals can be taxable.

An offshore investment account such as an International Wrapper ticks a lot of the boxes in terms of tax efficiency and favourable treatment on emigration.

How does financial emigration work?

Financial emigration no longer exists and was eliminated in March 2021. Now, individuals must inform SARS when they leave the country and intend to do so permanently, which will result in them “ceasing to be a tax resident” and change tax residence to their new home country or jurisdiction. The steps to do this are listed further below under “Already Emigrated”.

What tax event occurs when I cease to be a South African tax resident?

Ceasing to be a tax resident is a pivotal moment with significant implications. At this juncture, you’re considered to have disposed of all your worldwide assets, similar to a tax event triggered by death. This deemed disposal results in Capital Gains Tax (CGT) becoming payable on your worldwide assets, except for specific exclusions, and is known as “exit tax”. The date of cessation is crucial, either determined by a Double Tax Agreement or the date you decided not to return to SA. If you cease residence during the tax year, you’ll have two separate tax returns for that year: one as a resident and one as a non-resident.

What are the practical implications of an “exit tax”?

A deemed disposal of worldwide assets is assumed for tax purposes, which will trigger an immediate payment being required to SARS to fund the capital gains on assets sold.

Certain assets are excluded from this deemed disposal, the most relevant being immovable property situated in the Republic:

  • SA immovable property and an “interest in immovable property”
  • Interest in an SA Retirement fund, such as a retirement annuity, pension fund, provident fund or preservation fund
  • SA insurer owned long-term insurance policy, such as an endowment or SA owned international wrapper

For private company shareholders, ceasing to be ordinarily resident or tax resident can lead to the deemed disposal of their shares in the company, necessitating an immediate CGT payment. This often poses liquidity challenges for SA business owners living abroad and may force them to sell shares at discounted rates to fund their “deemed” tax liabilities.

Already Emigrated

How do I inform SARS that I have left South Africa and am no longer tax resident?

The standard procedure for individuals permanently leaving South Africa and ceasing tax residency, often referred to as “tax emigration”, is as follows:

  1. Complete the “Registration, Amendments and Verification form” (RAV01) on SARS eFiling. Make sure you capture the correct date on which you ceased to be a tax resident under the “Income Tax Liability Details” section. RAV01 must be updated prior to the submission of your annual tax return to avoid the tax return being selected for manual intervention by SARS.
  2. Look out for a letter from SARS in response to this form and submit the supporting documents that SARS requests, which will include the “Declaration of Ceasing to be a Tax Resident”. A motivating letter and proof of change of residence will be required.
  3. Refer to the “Cease to be a Resident” page on the SARS website for more information.

How do I access my existing South African retirement funds?

As of 1 March 2021, retirement annuity, pension preservation and provident preservation fund rules have been amended. In order to access the retirement monies as a lump sum, fund members will now have to prove to SARS that on or after 1 March 2021, they have not been tax resident for at least three consecutive years in a row.

This requires the member to have submitted their RAV01 and supporting documentation to SARS when leaving SA or ceasing to be a tax resident, and then three years later they can apply to have their retirement funds paid out as a cash lump sum. The lump sum will be considered a taxable withdrawal and can be taxed up to a rate of 36%. If the SARS system still recognises you as a South African tax resident, access to your retirement annuity funds will be denied.

I receive a pension income in SA (from a Living Annuity or Life Annuity), what are the tax effects, and can I get any tax relief?

According to the Income Tax Act, annuities and pensions are fully taxed in South Africa, even if you’re not a tax resident here.

South Africa has agreements with other countries to avoid double taxation. If you’re not a resident for tax purposes in South Africa, you might get tax relief under these agreements. This could mean that you’re only taxed in your new country of residence for your annuity or pension income.

If you are a non-resident earning a pension income in SA, you can apply to SARS for tax relief in the form of a “DTA tax directive” using a form called RST01. This form asks for relief from South African taxes on pension and annuity income according to the Double Taxation Agreement. Effective 1 March 2023, a SARS DTA directive is valid for a period of three years and can be sent to your pension provider to zero or reduce your income tax payable on future income.

If you’ve already paid taxes on your South African pension or annuity income, you can apply for a potential tax refund. To do this, you can submit a form called RST02. This form is for tax non-residents taxed who want a refund of the South African tax they paid on their pension or annuity income because of the Double Taxation Agreement.

Tax Residence

What is the purpose of tax residence?

Tax residence refers to the concept used by tax authorities to determine an individual’s liability to pay taxes within their jurisdiction. The purpose of tax residence is primarily to establish a clear framework for taxing individuals based on their connection to a particular country. This concept becomes especially important in an increasingly globalised world where people often live, work, and invest in multiple countries.

How do I determine if I am a South African tax resident?

You are a SA tax resident if you meet one of two requirements. These two tests are mutually exclusive.

  1. Ordinarily resident – SA is your main home, family are here, consider SA “where you will return”. In other words, South Africa is your “real home”.
  2. Physical presence test – This involves a lengthy requirement of six years. To become a tax resident using this test, you need to have been in South Africa for more than 91 days in each year of the current year and the previous five years, totaling at least 915 days. If this leads to tax residency and you wish to break it, you must leave for 330 consecutive days.

Double tax agreements (DTAs) play a critical role in resolving tax residency uncertainties. Remember, you cannot be a tax resident in two countries simultaneously. Each country has its own tax residence rules, and DTAs determine where you’ll be considered a tax resident and how you’ll be taxed.

How are SA tax residents taxed?

If you are considered a SA tax resident, you’ll find that your tax liability extends to your worldwide income, capital gains, and even estate duty on global assets. Additionally, the donations tax applies to any global donations you might make. An important point to note is in an environment of much higher global interest rates; South African residents are required to disclose offshore interest income, which will be fully taxed in SA (after being converted to Rands). Even if these funds remain overseas, the South African Revenue Service (SARS) has the authority to track foreign accounts and interest earned, imposing fines for non-disclosure.

Tax relief for South Africans working abroad

For South African residents earning foreign remuneration, the physical location where the work is conducted determines the taxation. This means that the location of the employer, salary currency, or bank account location does not influence the taxability of the income. To benefit from a R1.25 million annual exemption, SA residents earning foreign remuneration must be out of the country for at least 183 days, with 60 continuous days during the tax year. This excludes any person working as an officer or crew member of a ship engaged in the international transport of goods or passengers for reward.

How does my tax liability change when I leave South Africa permanently?

When you cease to be a SA tax resident, your tax responsibility shifts. You’ll only be taxed in SA on income generated within South Africa. This includes SA-sourced interest, rental income, and any employment remuneration physically acquired within the country. If you leave South Africa, it’s crucial to submit your SARS tax returns indicating zero or reduced earnings to avoid penalties.

How are non-resident individuals taxed in SA?

If you are not a resident of South Africa for tax purposes, your tax liability primarily concerns capital gains from immovable property. However, when it comes to interest income, a 15% Interest Withholding Tax applies to any SA-sourced interest payments to non-residents. It’s important to note that some investments, such as government bonds, SA bank products, and SA-listed debt, are exempt from this tax, allowing foreigners to enjoy a 0% tax rate on interest earned from these products.

Article by Investonline

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