South Africa has seen a growing trend of emigration over the years, driven by various reasons like career opportunities abroad, quality of life, or even safety concerns. However, if you’re considering packing up and leaving the country, there’s an important aspect to consider: the tax implications. Tax is an integral part of your emigration process and can affect your financial situation both in South Africa and abroad.
Let’s break down these complexities and explain the essential tax considerations when emigrating from South Africa.
Tax Residency in South Africa
Your tax obligations in South Africa are largely dependent on whether you’re considered a tax resident. South Africa follows a residency-based tax system, which means that residents are taxed on their worldwide income, regardless of where it was earned.
What is Tax Residency?
In South Africa, you are classified as a tax resident based on either the ordinary residence test or the physical presence test.
- Ordinary Residence Test: This test focuses on whether South Africa is your true and permanent home, where you regularly return after traveling abroad.
- Physical Presence Test: This test examines the number of days you’ve physically spent in the country. If you’ve spent over 91 days in South Africa in a tax year and cumulatively over 915 days in the past five years, you could still be regarded as a resident.
Financial Emigration Defined
Financial emigration is the process of formally informing the South African Reserve Bank (SARB) and South African Revenue Service (SARS) that you are leaving the country. This process used to involve significant paperwork, but the process has been streamlined since March 2021.
Key Changes to Financial Emigration Post-2021:
Before 2021, emigrants needed to financially emigrate through SARB. Now, financial emigration focuses primarily on tax residency. The SARB process has been abolished, and emigration now centers around notifying SARS of your change in tax status.
.
Tax Implications of Emigrating
When you decide to emigrate, South African tax laws trigger several events, the most important of which is Capital Gains Tax (CGT).
Capital Gains Tax on Worldwide Assets
Upon emigration, you’re deemed to have disposed of all your worldwide assets (excluding South African real estate). This “deemed disposal” triggers Capital Gains Tax, where you pay taxes on the increase in value of these assets as though you had sold them.
Deemed Disposal for Capital Gains Tax (CGT)
The concept of deemed disposal means that SARS treats your assets as though they were sold on the day you cease to be a tax resident. This means you will need to calculate the capital gain (or loss) on your assets and settle any tax liability with SARS.
Example:
Imagine you own shares worth R2 million, and when you emigrate, they have increased in value by R500,000. You will be taxed on that R500,000 gain, even though you haven’t actually sold the shares.
South African Tax on Foreign Income
Once you’ve formally ceased to be a South African tax resident, only income from South African sources will be taxed by SARS. However, this doesn’t mean you’re off the hook entirely. If you earn foreign income, the Double Taxation Agreements (DTA) between South Africa and other countries ensure you aren’t taxed twice on the same income. DTAs are important in determining how much tax you’ll pay in your new country and how much, if any, remains payable to SARS.
Exit Tax on Emigrants
An exit tax is effectively a “departure tax” imposed on your worldwide assets when you leave the country for good. It includes deemed capital gains tax on assets like shares, investments, and intellectual property.
Exchange Control and SARB
Understanding exchange control is crucial when emigrating. While SARB no longer plays the central role it once did, there are still important exchange control regulations that need to be considered. For instance, if you haven’t formally financially emigrated, you may face restrictions when trying to move money abroad.
Process of Tax Emigration
The process of tax emigration involves officially notifying SARS that you are no longer a tax resident. This is done by filing a notice with SARS and completing relevant documentation. It’s crucial to have your tax affairs in order before initiating the process, as outstanding taxes can delay or complicate the emigration process.
Retirement Funds and Tax Emigration
One of the benefits of tax emigration is that you may be able to access your South African retirement funds. However, there’s a catch: you need to wait three years after becoming a tax non-resident before you can withdraw from your retirement annuity. This is a new rule introduced in March 2021.
Tax Treatment of South African Assets
Once you’ve emigrated, South African assets like property, businesses, or investments continue to be taxed by SARS. However, your worldwide assets outside of South Africa will generally be exempt from South African tax.
Planning Ahead: Avoiding Double Taxation
To avoid double taxation, it’s essential to understand how your new country of residence taxes your income. Working with tax experts like Walker and Associates can help you navigate DTAs and ensure you aren’t taxed twice on the same income.
Seeking Professional Advice
The emigration process is complex, and tax experts like Walker and Associates are invaluable in guiding you through it. They can ensure you are fully compliant with both South African and international tax laws, helping you avoid penalties and unnecessary taxes.
Case Studies
Many South Africans have successfully navigated the emigration process, but it hasn’t always been easy. Learning from real-life case studies can provide insight into the challenges and opportunities of emigrating.
Conclusion
Emigrating from South Africa comes with a range of tax implications that can significantly impact your financial future. Whether it’s capital gains tax, retirement funds, or avoiding double taxation, understanding the tax landscape is crucial. Working with professionals like Walker and Associates ensures that you can make the transition smoothly and avoid any unpleasant surprises from SARS.
