Worldwide Income Tax Starts in only 18 Months!
Action Is Required
Here’s what you need to know…Hundreds of thousands of South Africans have built a life overseas. Simply put, it makes good economic sense to work as an expatriate and get paid in a currency other than Rand.
Against the US dollar, the Rand has fallen 50% in seven years.
Furthermore, those South Africans located in places such as UAE or Singapore benefit of working in a low-tax, or no-tax, environment.
But these days are soon coming to a close - unless you take action now.From 1st March 2020, if you are a South African expat, you will be forced to pay tax on your worldwide income – meaning a blanket tax on your foreign employment income over R1 million. You may be able to apply for a credit in respect of income tax paid in your foreign host country, but if you’re based in a low tax environment, you’re about to be in for a jolt.
At current rates (September 2018) the threshold is equivalent to a monthly income of only AED 21,000, USD 5,700, or GBP 4,400.
According to Wikipedia, there are at least 700,000 South Africans expats around the globe. And collectively, they are only just waking up to the formal ‘Financial Emigration’ process, created by the authorities to allow them to legally remove themselves from the South African tax regime.
What Is Financial Emigration?Financial Emigration changes your status from ‘resident’ to ‘non-resident’ for South African tax and exchange control purposes. Effectively you de-register with the tax authority, SARS. Financial Emigration is a formal, tax-compliant process with the South African Reserve Bank (SARB).
Why You Need To Act NowIf you haven’t already considered Financial Emigration, you should do so immediately.
18 months might seem like a long time – but the Financial Emigration process right now has a lead time of 6 months. This is before there is a major rush by the hundreds of thousands of South African expats who can benefit.
Experts estimate, that by the time 1st March 2020 comes around, the lead time for Financial Emigration will be OVER TWO YEARS.
After that date, even while you are waiting for the process to be completed, and before you receive your Emigrant’s Tax Clearance, tax will be due on your worldwide income.
Financial Emigration has the Following Benefits
- Fully legally and compliantly you protect yourself from the new worldwide taxation regime – you will have no South African tax on your foreign income whatsoever.
- You can legally and totally remove most of your current assets from the SA tax system, avoiding future tax on capital gains.
- You can encash and access your retirement annuity, at any age, and transfer the full value out of South Africa.
- You can transfer out of South Africa any passive income including rental income, dividends, director’s fees and income from trusts.
- Proceeds from South African inheritances and third-party life policies can also be transferred out of South Africa.
- You can save and invest internationally, in currencies of your choice, using whatever tax-efficient structure meets your specific needs.
- You can ‘backdate’ your financial emigration, to the date you actually left South Africa, potentially lowering any capital gains tax liabilities.
- Financial emigration draws a line under your tax non-residency status, which cannot be reversed even by SARS itself, thus protecting yourself from any future increases in the tax rate.
- Financial emigrants qualify for a Foreign Capital Allowance, being R10 million per adult per year, or R20 million per family. Plus you have a travel allowance up to R1 million per adult and R200,000 per child.
- You are allowed to export household and personal effects, vehicles, stamps, coins (excluding legal tender), and gold bars, up to an overall value of R2 million.
Note that Financial Emigration is NOT the same as ‘normal’ emigration. You are NOT required to give up citizenship, nor hand back your passport, nor sell property, nor cancel bonds or financial products.
|Classified as a South African tax resident, living abroad. Subject to tax laws including declaration of worldwide income, and any financial regulations that apply to South African residents.||Cease to be a South African tax resident, and not liable to pay any South African tax on worldwide income, but required to declare any South African sourced income which will be table.|
Possible Disadvantages of Financial Emigration
- Your South African bank account will change from a resident to non-resident ‘capital account’, meaning you lose internet banking, but will be assigned a relationship manager at your bank, so instructions will be by email or telephone.
- You are not permitted to hold a credit card in South Africa, nor personal loans (mortgages and vehicle finance are allowed); so these will need to be settled before the Financial Emigration process.
- Financial Emigration triggers a capital gains tax liability, which needs to be settled; but as noted above, this can be backdated. From this point forward though, you are only liable to capital gains tax on your South African fixed property (and there is no deemed capital gains tax on your property at time of Financial Emigration).
- You must abide by the physical presence test for South African residency, meaning you need to limit your time there to less than 91 days a year (though probably not an issue if you are a genuine expat).
The South African Financial Emigration ProcessThere are a few key regulatory components, per the South African Reserve Bank (SARB) and the South African Revenue Service (SARS):
- Your tax returns must be up to date;
- File a MP336(b) form “Emigration: Application for foreign capital allowance”;
- Emigration formalised through a local commercial bank of your choice in South Africa;
- Apply for a Tax Clearance Certificate from SARS.
Important! There are many complexities to the process, and it is strongly recommended that you take advice and guidance from a tax consultant or financial specialist.
Emigrants Capital Account
- Your remaining South African assets are brought under control of the bank that formalises your Financial Emigration, to ensure that capital accrued after emigration, and proceeds of assets subsequently sold, are placed to the credit of your capital account.
- Such funds may be used locally for any purpose.
- The Financial Surveillance Department of SARB, on application, considers requests to transfer any emigrant’s remaining liquid assets that exceed the foreign capital allowance.
Is Financial Emigration Right For Me?As attractive as it sounds, making yourself non-resident from the South African tax system may not be right for you.
- Financial Emigration is appropriate if you intend to have little or no ongoing connection with South Africa, except for still using your South African passport, or for the occasional holiday. (Although, of course, intentions can change in the future.)
- Financial Emigration is most likely NOT suitable if you think you will return to the Republic in the near future, or have immediate dependent family there.
- In some situations, an alternative to Financial Emigration may be relevant – specifically using a Double Taxation Agreement between South Africa and your host country.
What Happens If I Want To Return To Live In South Africa In Future?Plans change, and the South African government recognises this. Moreover, it is considered especially important to welcome back returning emigrants, whether for employment or future retirement. With this in mind, South Africans who have ventured internationally are encouraged to come back, to support the economic growth of the nation, and counter skills shortages. If in the future, you decided to return, it is a straightforward matter to re-register again as tax-resident in South Africa.
Using A Double Taxation Agreement (DTA) Instead of Financial EmigrationFollowing the DTA process is somewhat more complicated than Financial Emigration, and is generally applicable for expats on short term work contracts or who intend to return to South Africa within a few years. Also, South Africa does not have DTA’s with all countries, but fortunately there are DTAs in place with many of the popular expat destinations.
Applying a DTA your situation is an annual process, meaning each year you have the administrative burden of convincing SARS that you qualify as tax non-resident according to the relevant DTA. Moreover, SARS generally a certificate of tax residency, to be submitted from the country your are paying taxes in. This is not always a simple task, and in the UAE requires typically two days of your time to go through the process, or find a service provider that will do this for you. Also, some countries don’t have a formal process for such a certificate, or there may be very stringent requirements to obtain one. There is an annual cost in time and money to go the DTA route.
DTA’s present a less permanent solution than Financial Emigration, and therefore riskier, as you’re more exposed to future changes in the South African taxation regime. Nothing is final, because of the yearly need to submit documentation.
So What Should I Do Next?Your first step should be an initial review of your personal tax profile by a specialist. This is a straightforward exercise, but essential – because for Financial Emigration to proceed, your tax affairs need to up to date, correct and compliant.
If your tax situation is non-compliant, the specialist will be able to advise and assist accordingly. After the review, the consultant can advise you the pros and cons of Financial Emigration and/or DTA, relevant to your circumstances. Upon your instruction, he or she will be able to work with you directly to handle either process.