SA emigration and Capital Gains Tax
READER QUESTION
Is there a tax-saving route to financial emigration? If I proceed with financial emigration to Mauritius, will I still be personally liable for capital gains tax on the shares I hold in a company?
Brian Butchart / 9 September 2019:
I currently fully own Company A, which owns shares in another company, Company B. Company B went through a funding round and I’ve chosen to sell some shares belonging to Company A. I’ve paid capital gains tax (CGT) on the share sale amount from company A (22.4%). If I proceed with financial emigration to Mauritius by purchasing a property (or my company purchasing the property), will I still be liable for paying CGT personally for my shares held in Company A? If so, can you suggest any tax-saving route to financial emigration please?
The reader raises several points in that they wish to proceed with financial emigration, which is the most important aspect of the question, and how the relevant transactions will be treated.
Financial or formal emigration means a South African resident decides they will no longer be resident in South Africa and have the intention of leaving the country permanently, the main purpose of which is to access and transfer all South African funds and assets abroad, particularly those in retirement annuities (and now also preservation funds) prior to retirement.
Those with one foot out the door
Financial or formal emigration may also be to alleviate the potential tax liability to the South African Revenue Service (Sars) of those SA tax residents who currently work abroad and earn more than R1 million a year and have no intention of returning to South Africa (this has specific reference to the amendment of the Income Tax Act, which comes into effect on March 1, 2020).
Sars’s Interpretation Note 3, issued on June 20, 2018, and dealing with the ordinarily resident definition, states the following: “Generally, if a natural person emigrates from the Republic to another country, that person ceases to be a resident of the Republic from the date that person emigrates.”
This will result in the physical presence test being applied in the following tax year to determine if they are still a resident for tax purposes. If they are absent from South Africa for 330 days over the two tax years, they will no longer be a South African tax resident. The effective date will be the date on which emigration took place.
From that date, worldwide income will no longer be subject to income tax in South Africa – only income from a South African source will still be subject to tax in the country – subject to the provisions of any double taxation agreement that may exist between South Africa and the country in which the person now resides.
CGT liability
When South African resident taxpayers become non-resident for tax purposes (but don’t meet the ordinarily resident or physical presence tests) they may become liable for CGT. In the case of any person approved as a non-resident, the Income Tax Act treats the move as a deemed disposal of all assets.
When a person is no longer a tax resident, it is deemed that all assets are disposed of the day immediately before the cessation of residency. It is treated as if those assets are disposed of at market value on that day and then bought again at market value (which will be the new base cost when the asset is eventually sold in the future).
Whether the asset is physically sold or not is irrelevant, as a deemed sale for the calculation of capital gains is assumed on the date of emigration.
The only exception to this rule is immovable property. The act determines that immovable property won’t be included in the deemed disposal provision, as non-residents are still liable for CGT when selling property anyway.
Company shares wall fall in the CGT net
Therefore if you are buying property in Mauritius for Mauritian residency (purchase price of $500 000 or more) and your intention is to officially emigrate and make Mauritius your new tax residence, you will be liable for CGT on all discretionary assets in South Africa except immovable property, and this includes the shares in Company A.
Considering the implications of the capital gains tax liability, it is always a good idea to calculate the total estimated capital gain across all discretionary assets and/or any tax liabilities of any retirement assets, should you be withdrawing these from South Africa, in order to make an informed decision.
It is important to note that once the individual emigrates they need to adhere to the rules from both a South African Reserve Bank and tax (Sars) perspective thereafter.
Physical presence test
The physical presence test is based on the amount of time a person spends in South Africa during the year of assessment (tax year) and also during the preceding tax years. This test is only conducted if the person is not ordinarily resident during that tax year. The requirements refer to the number of days that a person must actually be present in the country during a tax year and also during the five tax years preceding the year under consideration.
Based on this test, a person is a South African tax resident and liable for income tax on their worldwide income in South Africa if they are physically present in the country for a period or periods exceeding:
91 days in aggregate during the year of assessment under consideration;
91 days in aggregate during each of the five years of assessment preceding the year of assessment under consideration; and
915 days in aggregate during the five preceding years of assessment.
If a person who is a resident is physically outside of the country for a continuous period of at least 330 full days immediately after the day on which they cease to be physically present, that person’s tax residency is deemed to have ceased on the day they left the country.
It is important to remember that a natural person who is ordinarily resident, spends time outside of the country, and intends returning is regarded as a tax resident – regardless of the period of time spent outside the country.
Before making any final decision to change tax residency, or to financially emigrate, it is always advisable to consult with a tax specialist.
You emigrated from South Africa! Really? What’s next?
Written by Hugo van Zyl CA(SA) TEP MTP(SA) 10 November 2019
You emigrated from South Africa! Really? What’s next?
Did you correctly emigrate from South Africa and what is you understanding of “emigrated”?
The Income Tax Act use the words “cease to be a resident”. Tax specialists, like writer prefers to add the word
Being a person not resident for tax (tax non-resident) brings certain benefits, obligations and and often switch off certain tax exposures, but not all!
Once solely tax resident in a treaty country, you may escape SARS Income Tax but not SARS Estate Duty!
Yes, Countries like Mauritius and UAE have forced heirship or Sharia Succession rules, yet this does not remove the estate duty (situs or death taxes) in South Africa!
SA Ordinary Residence Tests:
It’s a common misconception that if a South African is living and working overseas they do not have to pay any South African income tax on their earnings. Although some overseas income may be exempt in terms of the Income Tax Act, it must be remembered that if you are classified as a South African resident you will be liable for tax on your overseas income.
A person will be treated as a resident for tax purposes if they are either ordinarily resident in South Africa, or if they meet the criteria of the physical presence test.
The ordinary residence test takes into account various factors in order to establish the country that would most accurately be described as the individual’s real home.
The physical presence test looks solely at the number of days spent in South Africa over the previous five years. A person will be treated as an SA resident when they meet all of the following criteria regarding the number of days spent in South Africa:
91 days in total during the current year of assessment; and
91 days in total during each of the previous five years of assessment; and
915 or more days during the previous five years of assessment
When is income exempt from South African tax? Foreign income earned by a tax resident will be exempt from South African tax if the person works as a crew member or officer of a ship which is engaged in the transport of passengers overseas, or in the prospecting, exploration or mining for any minerals from the seabed outside of South Africa. This exemption will only apply if the person was outside of SA for a total of more than 183 full days during the tax year. In addition, any salary earned by a South African for services rendered outside of SA on behalf of an employer will be exempt – if that person was outside of SA for more than 183 full days (including a continuous period of 60 days) during any 12-month period that started or ended during the year of assessment. This exemption does not apply to income made through contracting, which would be fully taxable. National Treasury has had its eye on this exemption since 2017 with the initial aim being to repeal it fully. The main reason provided for this proposed amendment was to curb situations of double non-taxation of foreign income such as when an individual’s employment income was not being taxed in either SA or the foreign country.
R1 million exemption The current proposal by National Treasury to repeal the exemption fully has now softened slightly, and from March 2020 (expected implementation date) the first million earned by a person who meets the criteria for exemption will be exempt, and any income earned above this will be taxed at the normal rates applicable to individuals. The individual will also be entitled to reduce their resultant SA tax liability by offsetting some or all of their foreign tax paid where applicable. Many SA residents have considered leaving SA to escape the tax net – but for a person who formally emigrates or ceases to be a tax resident, there may be significant capital gains tax implications. The person will be seen to have sold all of their assets, with the exception of immovable property situated in South Africa, at market value on the date they ceased to be a resident and will therefore be liable for tax on the resultant capital gain on those assets. Regardless of whether a person is considering a permanent or temporary move to pursue overseas work opportunities, it is worth discussing the idea with a tax consultant. These factors can then be included in the decision-making process and help to avoid any nasty surprises from Sars.
RSA: Taxmigration vs. Financialemigration
Reference: https://taxmigration.com/2019/09/20/taxmigration-vs-financialemigration/ – I gratefully acknowledge Hugo van Zyl’s authorship of this article:
Eventually we have SARS buy-in and confirmation that formal emigration is not a tax act process.
What we now need is SARS and all tax practitioners to stop using a brand name to refer to a SARB process referred to as “to formalise their Emigration ” an Exchange Control resident
I am often challenged about the term #taxmigration not being defined or referred to, anywhere in any tax act! It is correct, it is not a defined term, it is my brandname hence http://www.taxmigration.com
Equally so, financial emigration is a brand name and through rather controversial press articles the group behind the name got the world to use their brand name. Credit to their marketing strategy but its now time we go back to basics and true facts!
Formal Emigration is the correct and preferred word, and hopefully soon the following SARS extract will correctly refer to Formal Emigration
What is the impact of financial emigration on tax residence?
Acquiring approval from the South African Reserve Bank to emigrate from a financial perspective is not connected to an individual’s tax residence. Financial emigration is merely one factor that may be taken into account to determine whether or not an individual broke his or her tax residence. An individual’s tax residence is not automatically broken when he or she financially emigrates. The deciding factor remains whether or not an individual breaks his or her ordinary residence.
Source: SARS webpage
The above extract is not necessarily 100% correct!
The last sentence should perhaps have read:
The deciding factor remains whether or not an individual breaks his or her tax residents status because of DTA or tax treaty rules and tiebreakers or because they are truly no longer ordinarily (yes, not ordinary but ordinarily) resident.
The above mentioned extract is not the only place where the SARS webpage needs urgent attention. The following FAQ extract is also incorrect or at least incomplete:
What qualifies an individual as a non-resident?
An individual is regarded as a tax resident of SA if he or she is ordinarily resident in South Africa or meets the requirements of the physical presence test. If neither of these apply, the individual will be regarded as a non-resident.
For more information on these two tests, please refer to the Guide on the Residence Basis of Taxation for Individuals 2008/2009.
Source: SARS FAQ pages
The correct wording, we respectfully submit should be:
What qualifies an individual as a non-resident?
An individual is regarded as a tax resident of SA if he or she is ordinarily resident in South Africa or meets the requirements of the physical presence test. If neither of these apply, or should a person be deemed to solely tax resident in a DTA or treaty country, the individual will be regarded as a non-resident.
The SARS Glossary R page is indeed technically more sound where it states (and we selectively quote):
Resident
As defined in section 1 of the IT Act– Includes: Any natural person who is ordinarily resident in South Africa; or Any natural person who complies with the physical presence test; and …, but: Excludes any person who is deemed to be exclusively a resident of another country for purposes of the application of any agreement entered into between the government of South Africa and that other country for the avoidance of double taxation.
Source: SARS Glossary R
Formal Emigration vs. Financial Emigration- what is the difference?
Their is no such process as financial emigration! It is a brand name cleverly marketed by certain product suppliers. Tax law solution (to cease tax residency as envisaged in ITA section 9H) purposefully (or is it dangerously?) confused with a lucrative business to assist with Formal Emigration
What then is the true wording or correct SARB terminology to use and what is the source for this?
We quote from SARB FAQ pages:
In terms of exchange control policy, private individuals (natural persons) who reside permanently in a country outside the Common Monetary Area are required to formalise their emigration by completing a Form MP336(b).
In conclusion
We call on all tax practitioners, authorised dealers, journalists and forex dealers to rather revert to the correct terminology:
Formal Emigration
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.
Top ten SARS trends
Article published on news 24 at https://www.fin24.com/Money/Tax/10-tax-trends-sars-is-clamping-down-on-20190701
Tax season 2019 officially opened on Monday July 1 for taxpayers who use the updated digital channels, namely eFiling and the SA Revenue Service MobiApp. This year, SARS is clamping down on non-compliant taxpayers – with the following 10 trends in the spotlight.
Outstanding or late returns
Outstanding returns and late returns remain a concern and SARS says it will step up its enforcement of penalties in this regard.
Rental and Capital Gains Tax
“Many taxpayers still do not declare rental income from properties and we will improve our data matching in this regard by collaborating with the Deeds Office.
“This matching will also allow us to better enforce non-compliance in the declaration of Capital Gains Tax,” says SARS.
Commission
SARS will renew its focus on monitoring income and expenses from commission earners.
Trusts
SARS is concerned about the accuracy of declarations of distributions to and from trusts to the beneficial recipients.
Refunds
“We have also noticed tax preparers unethically promising taxpayers that they will secure a refund. They then look for opportunities to understate income or overstate expenses,” says SARS.
“This is a serious offence and could result in criminal charges as well as financial consequences for the taxpayer who remains accountable to SARS for their submissions.”
Fabricated expenses, IRP5s
SARS has noticed a trend of fictitious refunds being claimed for fabricated expenses and losses, as well as fictitious employers generating IRP5s for the sole purpose of claiming refunds.
Multiple returns
Fraudsters file multiple returns to create refund opportunities and syndicates re-use IRP5s across multiple individuals.
Risk modelling
SARS is working hard to improve the integrity of its profiling capability by using sophisticated risk modelling and expanding our data set.
Last year SARS prevented over R8.2bn fraudulent returns from being paid.
Prosecutions
SARS is currently working with both the SA Police Service (SAPS) as well as the National Prosecuting Authority (NPA) to criminally prosecute fraudsters.
SARS has already successfully convicted a number of taxpayers for non-compliance. It has even successfully convicted some of its own staff for colluding with taxpayers.
The super-rich
“We are instituting a renewed focus on high net worth (HNW) Individuals who often arrange their affairs in complex ways, often presenting higher compliance risks to SARS,” the revenue agency said.