Unpacking the complex and costly financial emigration process
Many South African high-income earners working abroad are considering financial emigration as the tax exemption on foreign employment income is going to be capped at R1m from March 2020.
What it means
Financial emigration is a formal emigration process which means your status with the South African Reserve Bank changes from resident to non-resident for exchange control and tax purposes.
You will not lose your South African citizenship if you emigrate financially.
So there is no need to give up your passport, and you can return to live in SA at any time.
How much can you send offshore?
Exchange control in SA has been significantly relaxed, and you can now transfer R11m annually by using your foreign capital allowance of R10m and single discretionary allowance of R1m. These allowances are available to taxpayers in good standing over 18 years of age.
Retirement fund complexities
If you have money invested in a preservation fund, you can make a withdrawal and transfer the funds offshore. Similarly, you can withdraw the funds in your retirement annuity when you financially emigrate.
The decision regarding the transfer of retirement funds abroad can be complex. The withdrawal amounts are subject to high lump-sum withdrawal taxes, and if there's a possibility that you may return to the country at a later stage, it may be prudent to preserve some or all the funds in a local preservation fund.
If you have an investment-linked living annuity, the capital amount in the fund cannot be transferred offshore unless there's less than R50,000 left in it. You can, however, transfer the income from the annuity abroad, as with other passive incomes such as rental income, dividends and trust income.
The taxman looms larger than life
Investors are often quite surprised to learn that financial emigration triggers "exit charges" in the form of capital gains tax (CGT). You're deemed to have sold your assets on the day before you leave. This rule exists as the taxman forfeits the opportunity for income on the gain of the investments when you're a nonresident. Currently, 40% of the gain is included in your income and taxed at your marginal tax rate. This "exit charge" prohibits wealthier people with a portfolio of illiquid assets from financially emigrating.
Immovable property (including your home or commercial property) is excluded from these "exit charges" as the taxman will get his slice of the pie in the form of a withholding tax when you sell these as a non
If it makes good sense to emigrate for income tax purposes and the "exit charge" is prohibiting you from doing so, do remember that CGT always applies - when you pass away, for example, you're also deemed to have sold your investments.
Hedging the rand
Many South Africans who are not working abroad are "informally emigrating" by shifting most of their assets offshore using their discretionary and foreign investment allowance.
The motivation can be a hedge against the rand and/or their intention to formally emigrate at a later stage.
There's no saying that you'll get better returns offshore.
In rands, the 10-year real (after inflation) return of the JSE all share index has been around 7% a year, while for international shares it's been around 6.5%. This may change in the future.
The swallows speak volumes
Financial emigration can be a costly and complex process, so it's essential to get impartial advice from a qualified financial planner and a tax specialist. And remember, if you have investments abroad, you'll need a foreign last will and testament because a South African executor will not have the jurisdiction and right to deal with offshore assets. Also, there are forced heirship rules in some countries that you'll need to consider.
Financial emigration is also an emotional process in that you experience loss. There's undoubtedly something very special about our super-friendly, demonstrative and "go-getter" culture.
The existence of so many nonresident South African "swallows" speaks for itself. They come back to South Africa for many more reasons than the sunshine.
• Hugo is director of Sterling Wealth and was the FPI Financial Planner of the Year for 2018.