Expat tax debate: South Africans living overseas 'concerned about ever-growing tax liability'

2019-03-11 06:30
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The “expat tax” topic has received a lot of media coverage of late with some polarised views from professionals within the same industry leading to a lot of confusion particularly amongst South Africans living overseas concerned that they are facing an ever-growing tax liability in SA.

Tim Powell, director of forex at Sable International, looks at the cold facts of the situation.

In 2017 the National Treasury announced that the tax exemption on South African expatriates is set to change. The legislative amendment, which will come into effect on 1 March 2020, states that South African tax residents abroad will be required to pay tax to South Africa of up to 45% of their foreign employment income, where it exceeds the R1m threshold.

Sable says, this is again under review with a separate workshop set aside to deal with this issue. The upcoming change may not affect all SA expats.

This change may not affect all South African expats; here’s why

South Africa has a residence-based tax system. This means that you will only be affected if you are a resident or deemed to be a resident in South Africa. The South African Revenue Service (SARS) determines your residency status through the ordinary residence test or the physical presence test.

The ordinary residence test

You can still be regarded as being resident in South Africa regardless of the number of years you’ve spent outside of the country. This is because SARS determines your residency by where your assets and family are based as well as the location of your permanent home.

In some circumstances, dual residency is also a factor. If, for example, you’ve been working in Dubai for the past 10 years, you could find that you are a dual resident because you are a tax resident in both the UAE and in South Africa. In this situation you would need to check if there’s a double taxation agreement (DTA) in place and where that agreement assigns your residency to.

To claim relief of a DTA, you would have to prove you meet the criteria of its definitions. You will also need to obtain a certificate of tax residency from the overseas country you’re based in.

The physical presence test

This is a calculation of the actual amount of time you physically spend in South Africa. You’ll be considered a resident if you spend:

  • 91 days in South Africa in the current year of assessment
  • 91 days or more in each of the preceding five years of assessment
  • 915 days in total during those five preceding years of assessment What is Financial Emigration?

Persons regarded as South African Residents for Exchange control purposes who are leaving the Republic to take up permanent residence in any country outside the CMA may apply to an authorised dealer for emigration facilities.

It is important to note that SA residents, who have been living abroad but have not officially emigrated through the Reserve Bank, are considered SA residents for exchange control purposes.

Financial emigration is therefore an exchange control matter whereby a South African can only on application to the SARB financially emigrate and, on approval, become classified as a non-resident by the South African Reserve Bank (SARB) which incorporates the Financial Surveillance department.

This process involves:

  • Completing an MP336Application for emigration tax clearance certificate through SARS
  • Submission to SARBOn approval, opening of blocked Rand account into which any sale proceeds derived from any remaining assets in South Africa for example, surrendering a Retirement annuity or selling a property are deposited and can subsequently be transferred overseas.

From an Exchange Control point, there are 3 categories of persons:

1. South African Residents – living in South Africa

2. South African Residents temporarily abroad – any South African living overseas who has not financially emigrated

3. Non-residents – this includes South Africans who have financially emigrated

Getting back to the “Expat tax” topic, here are some tips from tax practitioners we agree with:

The intention of the tax payer and the steps they have taken evidencing that intention are critical; Financial emigration is not a specific requirement under the SARS ordinary residence test i.e. to satisfy the “non-tax residence status” of an expat living elsewhere.

It is a factor to consider in determining intent and good evidence of having acted on that intent; If the “primary residence test” cannot determine the tax residency of the individual as being in SA, one needs to consider the secondary “Physical Presence Test”, which is a day count exercise.

What is concerning is the different interpretations and opinions amongst tax practitioners and professional advisors and the polarised views expressed where on one side we have those promoting that Financial Emigration is a requirement, versus those that agree that Financial Emigration is not a requirement for becoming non-tax resident.

We agree with the camp that Financial Emigration does not automatically make a person non-tax resident, however it can be a contributing factor in determining the ordinary residence test. The ordinary residence test is determined by common law, ie. case law and there are cases that have been reported which deals with this particular aspect in detail. The physical presence test has been codified in legislation so it is simple to consider it’s applicability to any particular situation.

What also needs to be borne in mind is that, where there is a relevant tax treaty in place, you may be regarded as exclusively resident in another country for tax purposes, even if you satisfy SA’s domestic residency tests.

The benefits of financial emigration include:

  • Being able to access your South African Retirement Annuities before age 55 - Until you have financially emigrated, your status will be as a South African resident temporarily abroad from an exchange control point of view, and you will not be permitted to withdraw your South African retirement annuities out of the country. It is possible for any South African resident to withdraw pension and provident funds prior to retirement. However, accessing retirement annuities requires you to financially emigrate;
  • Being able to transfer future SA inheritance funds out of the country without being subjected to the SA resident exchange control process;
  • Should you have no intention to return to SA, financial emigration would tidy up your financial affairs with the South African Reserve Bank (SARB) and the South African Revenue Service (SARS);
  • Should you have no assets in SA and have been out of the country for longer than 5 years, you can financially emigrate with an exemption of needing to obtain tax clearance with SARS.

Financial Emigration would trigger a once off capital gain liability on certain assets (in SA and abroad) which are now “deemed” to have been disposed of. CGT will depend on the size of the gain (or loss = no tax) from such assets, as well as the nature of the assets. It is possible to “backdate” the financial emigration to avoid having to pay CGT on foreign assets you obtained after you left SA.

Every case requires some analysis whether Financial Emigration is necessary or would put you in a more advantageous position than you currently find yourself in, taking into account both your personal and financial circumstances. As always we would recommend speaking to a suitably qualified adviser that can consider your position and give you an accurate assessment. 

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