Financial emigration vs. becoming a non-resident for tax purposes: What’s the difference?

Financial emigration vs. becoming a non-resident for tax purposes: What’s the difference?
11th December 2018 by Editor
*This content is brought to you by Sable International. With offices in Cape Town, Durban, Johannesburg, Melbourne and London they are the perfect forex partner for businesses and individuals looking to transfer money into or out of South Africa.
By Tim Powell*

South African expats will have to face a changing tax structure in March 2020, which may affect their foreign income. This has forced many to think about and consider their tax residency status. We often see some confusion around the difference between financial emigration and becoming a non-resident for tax purposes. Many expats assume that either one, both or neither options may apply to them. It’s important that you understand what each process means before making any decisions regarding your tax status. We take a look at these in detail below to help you find the best option for your circumstances.

Becoming a non-resident for tax purposes
South Africa has a residence-based tax system, which means that residents are taxed on their worldwide income, regardless of where that income was earned. So, even if you’ve worked overseas for several years, if your tax residency is assigned to South Africa, you are required to declare your foreign earnings to the South African Revenue Service (SARS) and pay income tax. If your tax residency is assigned overseas, you are declared a non-resident and only income that is sourced in South Africa will be taxed by SARS.

How to determine your tax residency status
Your tax residency status is determined by SARS by way of two tests. These are the ordinarily resident test and the physical presence test. If you meet the requirements of these tests, you will be classified as a South African resident for tax purposes.

The ordinarily resident test looks at the location of your permanent home as well as where your assets and family are based. If these all point to South Africa, you will then be deemed a South African tax resident, regardless of the amount of years you’ve spent overseas.

The physical presence test calculates the amount of time you spend in South Africa. To pass this test and be deemed a resident for tax purposes, you need to be present in South Africa for:

91 days or more in the 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
If you fail to meet any one of these requirements, you will not be deemed as physically present in South Africa. However, you will still be required to pay tax on your South African assets, such as property that you rent out.

What it means to financially emigrate from South Africa
Financial emigration is the process of making a formal application with the South African Reserve Bank (SARB) to become a non-resident of South Africa. Once you’ve undergone this process, your status with the SARB changes from a permanent resident, or resident living temporarily abroad, to a non-resident of South Africa for exchange control purposes.

This process is simply an exchange control matter and will not affect your South African citizenship. You will always legally be a South African and you can return to South Africa to live and work whenever you wish.

Read also: 5 things you need to know about financial emigration in 2018

Once you have financially emigrated, the SARB will change your residency status from resident to non-resident. Your bank will then open a blocked Rand account in which all your South African assets will be kept before being transferred overseas.

Financial emigration is not a simple process. The complexity of your application will differ depending on your circumstances. You don’t need to be present in South Africa to begin the process and it can be done from your home abroad.

Once the process is complete, you can access and transfer the following out of South Africa:

Proceeds from your South African retirement annuities before the age of 55
Future inheritance funds without being subjected to the South African resident exchange control
Passive income from rental, dividends, director’s fees or a salary
Proceeds from a third-party life policy
Financial emigration is not required to transfer proceeds of other assets such as bank accounts, discretionary funds, living annuities, pensions and provident funds, proceeds from sale of property and life insurance policies. These funds can be transferred using your R1 million and R10 million foreign investment allowances.

However, the initial and ongoing tax treatment may differ significantly between different assets. Therefore, it’s vitally important that you obtain the correct advice before making any decisions or applications regarding your assets and tax affairs.

Taxes on your South African-based income
Financial emigration does not exempt you from taxation in South Africa. You still need to pay tax on any South African-sourced income. These could include interest on capital invested in a local bank or income from property rental.

Who should consider financial emigration?
Financial emigration is not necessary for everyone. Whether it’s right for you will depend on what kind of retirement savings and assets you hold. However, if you want to access your retirement annuity, then financial emigration is the only option.

While current tax law does allow expats to access their retirement policies, that could change in the future. If you have decided that you will not be returning to South Africa on a permanent basis and want to ensure that all your tax affairs are in order before there are any other legislation changes, you may want to consider taking this route.

Where to start
The process of financial emigration is complex and each situation is unique, so it’s always a good idea to get in touch with a South African financial emigration specialist. They can carefully consider your personal circumstances and advise you on the best course of action.

There are potential tax implications when financially emigrating, as well as opportunities to implement tax-efficient plans. For example, financial emigration can trigger a capital gain event. Seeking the advice of someone who has cross-border financial and tax planning experience will ensure that you make the right decisions.

SA Tax Worldwide 1 March 2020

Expat tax change from 1 March 2020: Treatment of taxation on foreign remuneration
by Fanus Jonck | Feb 7, 2019 | Migration news, News

Expat tax change from 1 March 2020: Treatment of taxation on foreign remuneration
At the moment there is a tax exemption in place for South Africans: If you are out of the country for 183 days or more with at least one trip of 60 consecutive days (not applicable for crews of ships), then foreign income earned while outside of South Africa is exempt from tax in South Africa. This is in terms of Section 10(1)(o)(ii) of the Income Tax Act, 1962 (Act No. 58 of 1962). This exemption is still in place, but the South African Revenue Service (SARS) has indicated that from 1 March 2020 this exemption will only apply up to a maximum of R1 million in earnings. This is the only change: A cap was introduced on this exemption.

Therefore, if you work abroad and earn R100 000 per month (R1,2 million per year) the maximum amount that would potentially become taxable is R200 000. There are however a number of other tests and/or factors to take into account.

Tax residency test
The test for tax residency is that any individual who is ordinarily resident (defined in common law) in South Africa during the year of assessment or, failing which, meets all the requirements of the physical presence test will be regarded as tax resident. A person is regarded as being ordinarily resident in the county where his or her primary home is and driven by intention, employment, location of personal belongings and where their family is situated. If ordinary residency cannot be determined, the physical presence test is a 5-year test of how much time you spend within South Africa. Having South African citizenship, a South African ID book or South African passport does not by default make you a South African tax resident.

For example, if you have sold your house in South Africa and you and the family have moved to New Zealand, you rent or own a house in New Zealand, your kids go to school in New Zealand and you are working there, then it is more than likely you are not a tax resident of South Africa. The new amendment therefore will be of no significance to you, as SARS can only tax non-residents on what they earn from a source within South Africa. You therefore don’t need to financially emigrate to not pay tax.

Double tax agreement protection
South Africa has about 60 double tax agreements (DTAs) with different countries. Most of these agreements were based on the same model, applying the rule that the country in which the taxpayer worked for 183 days or more per year would normally be the country with the rights to tax the employment income. Therefore, if you work outside of South Africa – in a country that South Africa has a DTA with – for more than 183 days, then your employment income is not taxable in South Africa because of this DTA protection.

For example: Mrs Jordaan and her husband go work in Germany for 18 months. They keep their house in South Africa and are in Germany temporarily, with the intention of returning to South Africa and are therefore tax residents of South Africa. In terms of Section 13 of the DTA we have with Germany and because they are there for more than 183 days, the income is only taxable in Germany. They don’t have any tax due in South Africa and the change will not affect them.

Foreign tax credits
Any foreign tax you pay would also be credited against your South African tax. For example: During the 2020/2021 tax year you work in France for 4 months, where you earn R800 000 and 15% tax is deducted. You then go work in Belgium for 6 months, where you earn another R800 000 and 20% tax is deducted. Your total foreign income would be R1,6 million and you would have paid R280 000 in tax. Because you are tax resident, your foreign income above R1 million will become taxable and therefore R600 000 of your earnings become taxable. The tax due in South Africa would be ± R179 000. You have already paid R280 000 in tax, so there would be no further tax due.

Who will be affected?
The new amendment will affect the following persons:

A South African tax resident working temporarily abroad and who earns more than R1 million while working in a country which does not have a DTA with South Africa and does not have enough tax deducted; and
A South African tax resident working temporarily abroad, earning more than R1 million and working in several countries (not more than 183 days in any of them) and not having enough foreign tax deducted.