You will never have to emigrate financially from SA
The Budget Review reveals you will now enjoy a higher foreign income exemption of R1.25m
Financial emigration through the SA Reserve Bank is to be phased out from next year and the tax exemption on foreign remuneration you can earn as an SA resident will increase from R1m to R1.25m on March 1 this year, the Treasury announced in the Budget Review on Wednesday.
High income earners have been using financial emigration - which involves changing your status at the SA Reserve Bank from resident to non-resident for exchange control purposes – to prove they are not resident in SA for tax purposes and to avoid potential tax on their foreign remuneration.
If you emigrate financially, you don’t have to give up your South African citizenship or passport, but you have had to close your credit card and bank accounts, Chris Axelson, chief director economic tax analysis at National Treasury, says.
Financial emigrants also faced capital gains tax as they were deemed to have sold all their assets in SA and had to make difficult choices about withdrawing their retirement savings and incurring the high taxes that come with making withdrawals. Typically, they have needed advice from advisers charging large amounts for this specialist advice, Axelson says.
Scrapping financial emigration will give people the flexibility to go and work or do business overseas and get experience without giving up their accounts in SA, and make it easier for them to return at any time, says Axelson.
The Budget Review notes that under the new system, as an individual you will be treated the same if you are an emigrant or a resident.
The test for whether you pay tax in SA remains the same: if you are ordinarily resident in SA and call it your home, you will be taxed here on your worldwide income.
You are also a resident if you pass the so-called “physical presence test”, which means you are physically present in SA for a period or periods exceeding:
- 91 days during the tax year
- 91 days during each of the five tax years preceding the relevant tax year
- 915 days in total during the five years preceding the relevant tax year
Previously, if you were an SA tax resident earning as an employee overseas, you could avoid tax on your foreign remuneration if you were out of the country for 183 full days in any 12-month period. This was set to change on March 1 so that your earnings from working overseas would only be tax free up to R1m.
The Budget Review reveals that this exemption has been increased from R1m to R1.25m.
Only income above this amount will attract tax in SA, starting with the local tax exemptions and lowest marginal tax rates.
You are also entitled to offset tax due based on how much tax you have paid in the country in which you are working, even if there isn’t a double-tax agreement with the other country.
Axelson says some South Africans working abroad have failed to tell the South African Revenue Service that their tax residency has changed. If they tell SARS now, they will owe tax in South African on their worldwide assets.
Some are therefore trying to backdate financial emigration through the Reserve Bank, but this will have capital gains tax implications and possible penalties even if financial emigration is scrapped from next year, he says.
Exchange controls have not been adjusted so you can still transfer R11m out of the country each year using your foreign capital allowance of R10m and the single discretionary allowance of R1m.
This is as long as your taxes are up to date and the Budget Review notes that, in future, you will be subject to a verification process that includes certifying your tax status, the source of the funds, and assurances that you aren’t money laundering or funding terrorism. This will be phased in from March 2021, according to the review.
Remember, as long as you remain an SA resident, you will pay tax on the income, dividends and capital gains from any investments made offshore.