Bid to avert financial emigration ‘won’t work’

By Jonty Leon and Jean du Toit Time of article published Feb 28, 2020

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In December 2017, a change to the foreign employment income exemption was promulgated into law. This has become known as the “expat tax”.

The exemption was capped at R1 million, which meant that South African tax residents earning foreign employment income above this threshold would no longer be exempt from tax in South Africa from March 1 this year.

From the proposal of the amendment to the expat tax, to the promulgation of it into law, and thereafter at various workshops with the National Treasury, stakeholders pleaded with the government and warned that implementing this change in legislation would lead to an accelerated cessation of tax residency.

The response from the government was that the formalisation of non-residency in those cases was to be encouraged. This view was short-sighted and has come back to haunt the government, as South Africans have, in many cases, chosen to emigrate financially and thus cease their tax residency with South Africa to avoid the expat tax.

In the 2020 Budget Review, there is a desperate attempt to change the mind of South Africans formalising their non-resident status, by increasing the exemption cap to R1.25m. This is welcome, but a little too late.

The increase will assist only a small group of South Africans working abroad, and merely dangles a carrot for the rest, to entice them to remain within the South African tax net.

The big issue that has been raised on numerous occasions with the government is fringe benefits, which, in many cases, deplete the exemption before one even considers the cash component of a salary to be taxed.

As there has been a massive increase in South Africans ceasing residency to avoid the change in legislation, the government has taken notice.

The loss of revenue as a result of South Africans ceasing residency means that the expat tax has backfired even before it has become effective.

The government has announced that it will remove some of the emigration formalities from an exchange control perspective, which will take effect from March 1, 2021.

These exchange control formalities will be replaced with an uncertain future regime, which leaves South Africans with 12 months of some semblance of certainty and to get their affairs in order before a new regime is put in place.

The government has confirmed that tax residency will still be determined per South African case law and legislation: the ordinarily resident test and physical presence test. This comes as no surprise, but it does show that the government understands that it needs to hold on to its South Africans abroad to ease a flailing tax base.

In theory, the financial emigration exit process will in future change from a SA Reserve Bank exchange control perspective, but remain as is from a SA Revenue Service (Sars) tax perspective.

With the Common Reporting Standards in full swing, having a hidden offshore bank account is a “luxury” of the past, as information is being shared with revenue authorities around the world.

The government has noted that “co-operative practices will remain in place to ensure that South African tax residents who have offshore income and investments pay the appropriate level of tax”.

Taxpayers must assume any bank account on their name will eventually be knowns to Sars, so remaining compliant is key while ensuring you are not caught when Sars “asks” about all your worldwide bank accounts.

Although we welcome a small increase to the expat tax threshold, as well as fewer exchange control restrictions for the future, the fact remains that the expat tax is disadvantageous for South African tax residents, as well as for the South African tax base.

The tide of South Africans making up their mind to “divorce” South Africa fiscally, formally letting the government know their intentions to leave the fiscal net, will probably not be affected by the Budget. To the contrary, it may accelerate the trend, as taxpayers have until March 1 next year to exit under a formalised dispensation.

Jonty Leon and Jean du Toit are admitted attorneys at Tax Consulting SA.


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