Droves of professionals are leaving South Africa yearly. The varying motivation to emigrate include factors like unemployment, rampant crime, load-shedding, etc. Emigration has adverse financial and tax repercussions. Sometimes residents relocate on a non-permanent basis intending to return later, but for others there is no returning. The permanence of relocating will likely result in the cessation of one’s tax residency in SA. It’s possible to leave South Africa and still be considered tax resident. It’s therefore apposite to know your objective so as to make informed decisions. This article’s ambit excludes discussions on financial emigration associated with exchange control processes, but advises on tax consequences of emigrating to another country.
As a South African tax resident, tax returns ought to be submitted to SARS. SA applies the residence-based tax system, wherein its residents are taxed on their worldwide income, regardless of where the income was earned, subject to certain exceptions. However, to become a non-resident for tax purposes you must cease to be a South African tax resident as defined in the Income Tax Act. Your tax residency status is determined by whether you meet the ‘ordinary-residence’ test or the ‘physical-presence’ test. In order to become a non-resident for tax purposes, you must prove that you are no longer ordinarily resident in South Africa by illustrating the intention to become resident in another country. However, if you are a South African tax resident in terms of the physical-presence test, you can end tax residency by remaining physically outside the Republic for continued periods of at least 330 full days after your departure date from South Africa.
When one chooses to emigrate, there are tax implications worth consideration such as Capital Gains Tax (CGT) from the subsequent disposal or deemed disposal of property as well as ‘exit tax”. According to section 9H of the Income Tax Act, ceasing to be a tax resident triggers a deemed disposal of worldwide assets for CGT purposes, thereby creating a taxing event regardless of the assets not being disposed of, excluding South African immovable property. The tax costs could be material where you own assets, which would trigger the CGT deeming provisions. According to SARS, the taxpayer is deemed to have sold all his assets (worldwide) at market value on the day they cease to be a resident. The tax that becomes payable is known as ‘exit tax’.
Exit tax is due on the day before the taxpayer becomes a non-resident for tax purposes on which they are deemed to have disposed their worldwide asset base. Once you cease being a tax resident, you will no longer be taxed in South Africa on your worldwide income but only on South African sourced income.
When the tax residency status changes to non-resident, through emigration, SARS will deem there to be an additional period of assessment due during the tax year. SARS will require a provisional tax return to be lodged if the year’s taxable income exceeds R1 million. If an actual sale occurred, then the assets are considered to have been disposed at market value. The taxes become due on the day the taxpayer leaves, even if the tax year has not lapsed. Departing South Africans are oblivious that exit tax is due and payable immediately when leaving, not at the end of the tax year when returns are filed. Additionally, departing taxpayers must inform SARS of their tax status change and must obtain SARS Tax Clearance Certificates to cease being South African tax residents.
In conclusion, the taxpayer risks incurring possible penalties for non-declaration and non-payment of taxes of up to 200% due to non-submission of exit tax. SARS could also spring a “jeopardy assessment” on you at any time, where you will be forced to prove that you are no longer a South African tax resident and do not owe SARS tax on your worldwide income. If you tax emigrate later (or are forced to prove yourself non-tax resident), you will become immediately liable for exit tax and SARS potentially has the right to work this out based on your current asset base rather than the one at the time when you left, which might be greater.
Article prepared by: Tinashe Chipatiso (Tax and Corporate Consultant)
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