Understanding South Africa’s Tax System:
South Africa operates a residence-based tax system, categorising taxpayers into two groups: residents and non-residents.
Residents are taxed on their worldwide income, regardless of where it was earned, although they may benefit from certain local exemptions and exclusions.
In contrast, non-residents are only taxed on income sourced from South Africa, ensuring that their foreign earnings and assets remain protected from being taxed by the South African Revenue Service (SARS).
Explaining the Two Tests:
One of the initial steps in your financial emigration process is proving to SARS that you intend to move abroad permanently. This process involves two ‘tests’ to determine whether the taxpayer should be classified as a tax resident or not.
The first test, so-called “The Ordinarily Resident Test” or in other words, “The Intention Test” is a key criterion used by SARS to determine an individual’s tax residency status. It focuses on your long-term intentions, habits, and lifestyle ties to a country. If you are considered ordinarily resident in South Africa, you are a South African tax resident and subject to tax on your worldwide income.
The second test, “The Physical Presence Test” or “Days Test” is used by SARS to determine whether a foreign individual or a South African citizen working abroad qualifies as a South African tax resident based on the amount of time they have physically spent in South Africa. This test is applied to individuals who are not ordinarily resident in South Africa but who have spent a substantial amount of time in the country. It is therefore vital to understand which test would apply to you when considering ceasing your tax residency.
The Difference Between Ceasing Tax Residency and Financial Emigration:
Ceasing tax residency means you are no longer considered a South African tax resident and will only be taxed on income and assets in South Africa, rather than on your worldwide income and assets. Financial emigration is a more extensive process that ensures your tax residency status aligns with your bank account and exchange control status.
This dual process formalises the cessation of your tax residency with SARS and facilitates the transfer of assets abroad, while also converting your South African bank accounts to non-resident accounts. This alignment ensures consistency between your tax status and your bank accounts.
Ceasing Tax Residency Process:
The cessation of the tax residency process is not automatic, and you will need to officially declare your change in tax position to SARS through a formal declaration. Additionally, you must ensure present and ongoing compliance on your SARS eFiling profile to successfully complete the process.
The change in your tax status involves a formal process that requires clear documentary evidence, referencing your objective factors to support your intention to reside abroad on a permanent basis. The evidence must be submitted to SARS in request to formalise your cessation application. A successful application will result in a Notice of Non-Resident Tax Status confirmation letter being issued by SARS, confirming the effective start date of your non-resident tax status.
Deemed Disposal of Capital Gains / Exit Tax:
In the event of formally ceasing your tax residency, a deemed disposal for Capital Gains Tax known as “Exit Tax” takes place. This is a “fictional sale” where the individual will be deemed to have disposed of their worldwide assets, excluding immovable property in South Africa.
SARS will take the difference between the original value of your capital assets and the market value of these assets on the day before you ceased tax residency. This will determine if there is a Capital Gain which may be taxable by SARS.
Approval International Transfer Pin (AIT):
This process has replaced the old Emigration Tax Clearance Certificate and Foreign Investment Allowance and is now referred to by SARS as the Approval International Transfer (AIT) Pin. The AIT Pin is essential for South Africans who wish to transfer funds internationally, particularly after financial emigration or when moving large sums of money abroad. It ensures compliance and provides individuals with the legal approval to move their assets abroad.
‘Unlocking’ your retirement benefits:
The 3-year lock-up rule for retirement annuities refers to a regulation introduced by SARS that requires individuals who have formally ceased their tax residency to wait three years before being allowed to withdraw and transfer funds from their retirement annuities (RAs) when financially emigrating.
Prior to these changes, individuals who financially emigrated could access their retirement annuities upon completing the financial emigration process. However, the new legislation introduced a waiting period for individuals who cease tax residency, ensuring that the system remains fair and that individuals do not immediately liquidate their assets when moving abroad.
Planning your Departure:
Both ceasing tax residency and financial emigration from South Africa play critical roles in shaping your financial and tax status when relocating abroad. It is essential to navigate both processes carefully to ensure a smooth transition, minimise tax liabilities, and manage the transfer of assets effectively. Understanding the distinct purposes of each will allow for better financial and emigration planning, and it is highly recommended that you seek specialist advice from experienced expatriate tax professionals to advise and assist you.
