Despite being in place for several years, tax emigration continues to cause uncertainty for South Africans leaving the country. The main consideration is not to leave the decision until it becomes a problem.
Taxpayers intending to settle permanently overseas are urged to notify the South African Revenue Service (Sars) of their change in status.
Once you have, you know exactly where you stand.
“You will be safe in the knowledge that Sars agrees with your tax non-resident status,” says William Louw, director and professional tax practitioner at Sable International.
Most people, particularly younger people with no assets, do not return to South Africa after being out of the country for five years or more.
Tax residency
“Most first-world countries will consider you a tax resident within a year. It can leave you in the position where the tax authorities fight over who has primary taxing rights and who has secondary taxing rights.”
It is trickier for South African taxpayers on a short foreign secondment.
If both countries regard you as being tax resident, the double tax agreement (DTA) will determine which country has primary taxing rights. The other country then defaults to non-resident status, which means they potentially have limited taxing rights.
Louw advises South Africans who are considering tax emigration to start planning the process at least six months to a year in advance.
It may require restructuring assets to pay the capital gains tax (exit tax) on the deemed sale of your assets.
Significant events to consider are whether you have triggered capital gains tax, since you will be deemed to have sold your South African assets the day before you leave.
The question is whether you have the cash to pay for it and whether you can afford the exit tax.
The process
Louw says taxpayers must inform Sars within 21 days of leaving the country that they do not intend to return to South Africa. However, there are some practical implications.
- Do you have employment? Maybe.
- Do you have long-term accommodation? Most likely not.
- Can you prove that you have built your life in the other country? No.
- Will you be able to show that you have severed your ties with SA?
- Will you have a tax resident certificate from the other country? No.
You will most likely be able to answer yes to these questions only after a couple of months in the new country, he adds.
The main risk of not informing Sars of your changed tax non-resident status is that the tax authority will assume you are still a tax resident.
The impact of this position is a tax assessment on your worldwide assets and worldwide income streams. It may also result in double taxation, with the two tax authorities fighting over who has primary taxing rights and who has limited taxing rights.
Sars has been sharing information with other tax jurisdictions through the Common Reporting Standard on the exchange of financial information for many years.
Once they align the information from the other tax jurisdiction with the South African identity number, there is nothing preventing Sars from raising an estimated assessment which cannot be objected to.
The onus is then on you to prove that the assessment is incorrect. Sars can also take the money from wherever they want if you do not pay while trying to prove that you do not have a tax exposure in SA.
South Africans who have tax emigrated are advised to deactivate their tax number if it remains active.
“The deactivation will inform Sars that you have no assets in SA, no income streams from SA, and no obligations to file tax returns,” says Louw.
The good and less good
Once the tax emigration process is complete, South Africans can access their South African retirement funds before maturity, provided they have been a tax resident of another country for at least three consecutive years.
However, a recurring headache is the interpretation and implementation of the South African Reserve Bank’s exchange control manual for local banks, notes Louw.
“It has huge implications for people receiving pensions and retirement annuities from SA. Their accounts are frozen, and they cannot get their money out of SA.”
Louw says things also become tricky when their tax number is still active, and they receive an inheritance from SA. South Africans will have to apply through the Approval of International Transfers (AIT) process to transfer their money through the discretionary allowance.
Sars uses this application process to ensure all historic tax obligations are met before any capital leaves the country. If tax emigration is done and dusted and the tax number deactivated, any inheritance from SA will be paid directly offshore.
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