Here’s what you need to know to ensure a smooth and compliant financial emigration process:
1. Understanding Tax Residency in South Africa
South Africa operates on a residence-based tax system, meaning residents are taxed on their worldwide income. If you’re living abroad permanently and want to avoid paying taxes to SARS on your global earnings, you must formally cease your tax residency. SARS operates on a two-test residency basis:
Ordinarily Resident Test
SARS uses the Ordinarily Resident Test to assess whether you are still considered a tax resident. This test determines if South Africa is still your “permanent home” based on 13 objective factors outlined in SARS Interpretation Note 3. While this is not an exhaustive list, key factors include:
- The location of your family;
- Your permanent assets; and
- Your intention to return to South Africa.
Physical Presence Test
If the Ordinarily Resident Test is not applicable, the Physical Presence Test may still classify you as a tax resident. This test looks at the number of days you’ve spent in South Africa over the past six years. If you exceed the threshold of days in the current tax year, SARS will also consider the previous five tax years. If the requirements of the Physical Presence Test are met, you will be deemed a tax resident, meaning your global income will remain subject to South African taxation.
2. Notification to SARS: Formal Declaration
To officially cease your tax residency, you must notify SARS. Here’s the process:
- Formal Application: You need to submit a formal declaration to SARS, confirming the date on which you will cease to be a tax resident and updating your personal details with SARS.
- Supporting Documentation: You will also need to provide supporting documents that prove your residency in another country, such as:
- Foreign tax residency certificates;
- Residency visas; and
- Proof of domicile in your new country
Once SARS receives your declaration and supporting documentation, they will review your application. If all is in order, they will issue a Notice of Non-Resident Tax Status, confirming the change in your tax residency status. This document is vital for ensuring you are not subject to future South African tax claims on your foreign income.
3. Deemed Capital Gains Tax (Exit Tax)
One of the most significant tax implications of ceasing your South African tax residency is the Deemed Capital Gains Tax (CGT), also known as the Exit Tax.
- Deemed Disposal: When you cease tax residency, SARS considers a “deemed disposal” of your worldwide assets (excluding immovable property within South Africa). In other words, it’s as if you sold your assets, and SARS taxes you on the capital gains made.
- Exemptions: Assets like your primary residence in South Africa or any immovable property located in the country are exempt from this deemed disposal.
4. Exchange Control Regulations
Financial emigration also involves notifying the South African Reserve Bank (SARB) that you are changing your exchange control status from a resident to a non-resident.
- Restrictions on Funds: As a non-resident, you may face restrictions on how much money you can transfer out of South Africa. Although these restrictions have been relaxed in recent years, it’s important to understand any limitations that may apply.
- Retirement Funds: Financial emigration allows you to withdraw your South African retirement funds early, which wouldn’t normally be possible until you reach retirement age. However, this withdrawal may be subject to additional taxes.
5. Penalties for Non-Compliance
Failure to follow the proper procedures when ceasing your tax residency can lead to serious consequences:
- Tax Penalties: If SARS determines that you should have been paying tax on your foreign income, they may impose penalties, backdate taxes, and charge interest on unpaid amounts.
- Exchange Control Violations: Non-compliance with exchange control regulations can result in severe penalties, including restrictions on accessing South African financial systems or transferring funds out of the country.
Seeking Professional Advice
Given the complexities of financial emigration, particularly when navigating tax laws, capital gains tax, and exchange control regulations, it is crucial to seek professional advice. By understanding and adhering to the legal and compliance considerations outlined here, you can make a smooth transition to your new tax status and mitigate the risk of penalties or double taxation.
