South Africans who are already living abroad but have not yet properly financially emigrated need to be aware of the major benefits of taking the important step of ceasing tax residency to get their tax affairs in order with the SA Revenue Service (SARS).
In reality, many citizens living abroad are not familiar with the intricacies of the South African Income Tax Act (“ITA”) and how the benefits of ceasing tax residency and financially emigrating will remove any future tax burden on foreign income and assets.
In terms of the ITA, SARS has the right to consider your worldwide assets for deemed disposal Capital Gains Tax (CGT) when you decide to cease tax residency by financially emigrating, but this is a once off ‘exit tax’ never to be repeated. And if you have already been living abroad for some time, it is possible to greatly limit this tax liability by backdating your financial emigration application. This provides taxpayers with legitimate relief since most people did not have foreign assets or foreign revenue streams at the time of leaving the country.
Living abroad versus financial emigration
Victoria Lancefield, expatriate tax specialist at Tax Consulting South Africa has observed that South Africans who have made the decision to permanently leave the country often delay the decision to formally financially emigrate.
“Waiting at least a few years before formally taking the decision to financially emigrate is fairly common, but it is vitally important to understand the tax implications when finally deciding to cease your tax residency,” Lancefield said.
Lancefield explained that “In the event of a cessation of tax residence, deemed disposal rules will take effect in order to prevent tax avoidance. It will be deemed that one has disposed of and again acquired their worldwide assets at the date of ceasing tax residency so that a Capital Gain Tax event may occur.”
“SARS has the right to levy this ‘exit tax’, which can be thought of as a ‘parting gift,’ on the taxpayer. Of course, the main benefit of ceasing one’s tax residency comes later when the taxpayer is no longer liable to pay SARS income tax on their foreign earned income,” she said.
Asset classes that attract CGT
The following classes of assets, will be considered for the deemed disposal CGT when the decision is made to financially emigrate:
- Properties (purchased abroad, not locally in SA)
- Kruger Rands(worldwide)*
- Cryptocurrency (worldwide)
- Shares and unit trusts (worldwide)
- Vested trusts (worldwide)
“The deemed CGT calculation is based on the value of the assets upon date acquired versus the of value of the assets at the time of ceasing tax residency from South Africa. Most tax residents only look into financially emigrating after they have settled in abroad and at that point they usually have also acquired most of their foreign assets. By backdating the date of when one ceases their tax residency from SA, one will be deemed non-resident as of the exit date from SA. As such only assets at time of exit from SA will be evaluated for deemed CGT, and the value calculated will also be backdated. Which is usually favorable as the value of most assets is usually less on a prior date therefore the gain would be less for CGT. ” Lancefield said.
Timing of financial emigration is key
Tax Consulting SA tax attorney Reabetswe Moloi added that this is why it is crucial to seek the correct legal and financial advice to ensure compliance, while limiting liability by correctly following the financial emigration process through SARS.
The timing of financial emigration and the allowance to backdate non-residency from the date an individual actually left South Africa, rather than taking the application at face value and erroneously adding several years of CGT to assets, is an important factor.
“This usually works favourably for the taxpayer as most people only acquire foreign assets after leaving SA, and a backdated value is usually lower than the current value of the asset, therefore limiting the gain that will be subject to CGT,” Moloi said.
“The process and calculations are complex and it is important to get the application correct the first time after seeking professional tax and legal advice because SARS will expect payment of the CGT fairly promptly either within 21 days of making a declaration or with the next provisional tax payment,” Moloi concluded.