Pictured above: Suné Alexander and Melissa Jacobs.
Melissa Jacobs unpacks this tricky topic for those planning to leave South Africa.
In January 2021 the Taxation Laws Amendment Act (TLAA) was signed into law. Effectively it does away with the distinction between residents and non-residents for exchange control purposes, and therefore, in essence, financial emigration. A main benefit of financial emigration was that if you were considered non-resident by SARB, you were able to access your retirement annuities before they matured and transfer them out of the country. Now, the government needs another way to determine whether a person has emigrated before they’re granted access to their retirement funds.
The South African Revenue Service (SARS) has a range of criteria to determine your tax residency status and whether or not you should be paying tax in South Africa, even if you no longer live there. SARS looks at factors such as how much time you spend in South Africa and where your family and assets reside. Tax emigration involves informing SARS that your tax status has changed and that indicates how you should, or should not, be taxed in South Africa. The most important thing to note here is that, as a South African tax resident, you pay tax based on your worldwide income and your worldwide asset base. Whereas a non-tax resident only pays tax on their South African sourced income and South African sourced asset base.
When would the taxes be due?
The day before you become a non-resident for tax purposes, you will be deemed to dispose of your worldwide asset base at market value. This triggers a Capital Gains Tax (CGT) event – also known as an exit charge. CGT is part of income tax and comes into play when you make a profit from selling something you own (an asset). The tax is calculated on the profit you make and not the amount you sold it for. As such, on the day you are set to become a non-resident you’ll be deemed to buy your asset base back – all for tax purposes. However, any fixed property situated in South Africa is excluded from this equation as it is always subject to South African tax. When you change your tax status, SARS will deem there to be an additional period of assessment due during the tax year. This will require a provisional tax return to be done if your taxable income exceeds R1 million in that tax year. If that is the case, your taxes will be due on the day you leave, even if the tax year hasn’t ended. If you fail to pay at this stage, and you do your return at a later time within the same period, SARS can go back to the date you left and claim a late penalty.
What happens when you change your South African tax residency?
- Up until the moment you change your tax status, you will get taxed on your worldwide income like normal.
- On the day of the change, you’ll be due to pay an exit tax (CGT).
- On the day of the change, you may have to report and pay tax on your South African sourced income. After you become a non-resident, you are no longer required to submit a South African tax return, unless you still have assets left in the country that are generating streams of income.
It is imperative to understand that changing your tax residency does not mean that you automatically undergo financial emigration, and you may not even benefit from applying for financial emigration.
How to tax emigrate from South Africa
Changing your tax residency status is a laborious and admin-intensive process. You need to deal with several different parties. There are also a number of complexities to be aware of in advance when making decisions to change your tax residency. As such, many people choose to rather engage professional services to take care of the process for them.
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