Many South Africans believe they are completely tax-exempt in South Africa once they have formally emigrated, but this is a huge misconception, says Coreen van der Merwe, managing director of the South African arm of the Sovereign Group, which provides international trust and structuring services to South Africans.
Van der Merwe says that financial emigration, also known as formal emigration, is the process of changing, with the SA Reserve Bank, a person’s status from South African-resident to non-resident.
“Apart from the obvious benefit to South Africans of protecting themselves from certain local taxes and currency volatility, one of the most important benefits (of financial emigration) is that retirement savings and annuities can be withdrawn and transferred offshore, even if the person is under the age of 55,” says Van der Merwe.
James Whitaker, a partner at PricewaterhouseCoopers South Africa, says there are two concepts of tax residence in South Africa: ordinary residence and the physical presence test.
Whitaker says ordinary residents in South Africa are taxed on a worldwide basis, and deciding to move overseas and ceasing to be tax resident results in a worldwide disposal of your assets.
“Effectively, capital gains tax (CGT) is 18 percent, so if you are thinking of selling all your assets and have to pay 18 percent in value of those assets, it can be quite a significant charge,” says Whitaker.
He says that if people choose not to sell their properties in South Africa when leaving, those properties when sold will also be subject to CGT - and may be subject to CGT in a foreign country as well.
“Any income that is left behind here, or any assets that drive an income if you have a rental property, will be subject to CGT,” says Whitaker.
Van der Merwe says that financial emigration has inherent benefits, such as certain tax exemptions, but can also be fraught with tax-related and other risks if not done with a professional service provider. She says many South Africans believe they are 100 percent tax-exempt in South Africa once they have formally emigrated, but this is a major misconception.
She unpacked the following issues for South Africans to consider:
* Tax efficiency:
When considering moving your assets offshore, it is critical that you research the tax efficiency of the recommended structure. You need to explore their nature, including where they are domiciled and the costs.
* Where is the money going to be invested? You need to understand how your money will be invested and whether the investment strategy will enable you to achieve your goals.
The professionals who advise you must be knowledgeable about legislation in more than one jurisdiction, and the advice must take into account your overall financial circumstances, tax position and estate planning.
Also take into consideration which countries are more difficult to get money out of in the case of a deceased estate and where inheritance taxes (estate duties) are high.
* Use your foreign investment allowance:
Sovereign often advises clients asking about diversification and offshore investments to use their foreign investment allowance to contribute to an international retirement scheme. Choose one that generates retirement benefits that can be paid anywhere in the world, including South Africa.
* Does formal emigration mean that you are not considered an SA tax resident anymore?
Once you've formally emigrated for exchange control purposes, you will no longer be a South African tax resident on the condition that you don't meet the “ordinary resident test” or the “physical presence test”, the two tests in South Africa that determine whether you are a South African tax resident or not. Therefore, your new status does not mean that you will necessarily stop paying South African taxes all together. Sovereign outlines that if, for instance, you receive rental income for immovable property you own, you’ll be liable for South African tax. And if you decide to sell this property, you will also be liable for CGT.
You can also throw the concept of tax migration into this mix.
“When you live in a country that has a double taxation agreement with South Africa and your permanent home is in that country, you will be taxed on your foreign salary in that country and not in South Africa.
“If, on the other hand, you have a permanent home in that country and also in South Africa, then the question becomes, where is your centre of financial influence? If the answer is permanent residency in the other country, then South Africa can’t tax you on your salary, but the same rules as outlined above, apply with regard to rental income and CGT if you rent or sell South African property.
"There will still be a tax liability in South Africa. It is also worth noting that this also applies even when you have formally emigrated and broken your ties with South Africa,” says Van der Merwe.