Tax warning for people leaving South Africa

South Africans who emigrate and cease tax residency still have to navigate complex regulations around banking, property, pensions, and fund transfers to avoid unintended tax obligations or penalties.

John-Paul Fraser, Team Lead of cross-border taxation at Tax Consulting SA and Mbalenhle Mahlaba, expatriate tax Specialist at Tax Consulting SA, said that this doesn’t mean expats have to sever all their ties to South Africa.

Many of these people still have bank accounts and pension money in South Africa or may want to buy property in South Africa.

Of the estimated 915,000 South African expatriates abroad, many have formally ceased their status as tax residents with the South African Revenue Service (SARS) to protect their worldwide income from the South African tax net.

However, this doesn’t mean all their dealings with and in South Africa have ended. Fraser and Mahlaba clarified that ceasing tax residency means SARS can only tax you on South African-sourced income.

Ceasing tax residency can be temporary if using a Double Tax Agreement between South Africa and the new country of residence or permanent through the once-off Financial Emigration process.

After finalising financial emigration, Fraser and Mahlaba said that individuals can keep all their assets in South Africa.

However, non-resident taxpayers must comply with specific regulations regarding their ongoing interests in South Africa, such as transferring funds and how short a visit should be to avoid retriggering tax residency.

They stressed that there are several things South African expats should keep in mind to stay on the right side of the law.

First, they said South African expatriates can still enjoy local banking products. Once you cease to be a tax resident of South Africa, though, your bank accounts must be converted to a non-resident status to align with your new tax status.

Importantly, details reflecting at SARS and financial institutions must correspond to avoid raising suspicion.

Non-tax resident bank account holders are not allowed credit facilities such as credit cards and overdrafts but have access to savings products.

Property and pensions

According to Fraser and Mahlaba, non-resident taxpayers can own property in South Africa and abroad. However, there is a difference in the loan amount banks can offer.

When applying for a mortgage loan from a South African bank to buy property in South Africa, the non-tax resident bank account holder can secure a loan of up to 50% of the property value.

Banks would first consider the value of one’s remaining South African assets and try to use that as a capital base to support the loan.

If one does not have any remaining South African assets or has externalised all of them, banks would then revert to the 50% loan-to-value lending.

Where South African pension funds and annuities are concerned, their withdrawal is restricted in terms of new legislation introduced in 2021.

The payment of lump sum retirement benefits is only allowed by Authorised Dealers (banks) if the individual has remained a non-tax resident for at least three consecutive years after cessation.

In addition, these non-tax residents must obtain the applicable Tax Compliance Status (TCS) from SARS. Banks may also require further source verification documents before processing transfers offshore.

“The good news is that the 3-year lock-in period does not apply to early withdrawal from the Savings Pot under the newly introduced Two Pot Retirement System,” they said.

“Expatriates may immediately make one withdrawal per tax year from their savings pot, but tax compliance is once again the starting point to access these funds.”

In case of any non-compliance in South Africa, SARS will deduct money from the withdrawal amount to settle any outstanding tax.

Expats face strict rules for moving money and visiting SA

Fraser and Mahlaba explained that expats should also be aware of the rules surrounding transferring funds into and out of South Africa.

South Africans are subject to strict banking and exchange control regulations enforced by the South African Reserve Bank (SARB).

This is the case whether transferring money abroad for investment, business or leisure purposes or when emigrating to a new country,

The Tax Administration Act and South Africa’s signing of the Common Reporting Standards (“CRS”) oblige all financial institutions to report taxpayer information electronically to SARS.

Local and foreign financial institutions must also report on financial data relating to foreign and national accounts.

For tax non-resident bank account holders, transferring capital funds abroad will always require an Approval International Transfer (AIT) TCS PIN from SARS.

On the other hand, income funds will require a Good Standing TCS PIN from SARS. This is to verify tax compliance before the transfer is authorised.

“Expats are not limited to any amount when transferring funds abroad but need an AIT for every cent that leaves South Africa.”

Fraser and Mahlaba said expats should note that non-tax residents do not have the Single Discretionary Allowance (SDA) available to them like tax residents do.

The SDA allows tax residents to transfer up to R1 million in a year without being required to produce documentary evidence relating to the funds.

The only exception is that those who ceased tax residency may, in the same calendar year that they cease to be residents, transfer up to R1 million as a travel allowance without the requirement to obtain an AIT TCS PIN letter.

This is a once-off dispensation. For transfers over R10 million, an additional SARB Financial Surveillance Department approval is required before your bank can transfer the funds abroad.

“This can take time and must be considered in your tax planning when you formally emigrate and cease tax residency. Professionals who understand these complexities are best placed to give guidance and assistance.”

Typically, resident sources cannot fund non-tax resident accounts, such as gifts, cash and deposits, or EFTs. These accounts can be funded by local Rand funds from capital assets and funds from abroad.

Capital assets are the remaining assets, which are South African sourced and were declared to SARS when formalising the cessation of tax residency.

Fraser and Mahlaba added that short-term visits to South Africa could also have tax implications for expats. In 2001, South Africa moved to a residence-based tax system for individuals, determining how they would be taxed.

An individual is a resident for tax purposes either by way of an ordinary residence test or by way of a physical presence test. SARS applies different tests to determine tax residency.

“South Africans who live and work abroad must familiarise themselves with the requirements to maintain non-resident taxpayer status when visiting South Africa for short periods.”

If one, so to speak, overstays their welcome in terms of the physical presence test – based on the average time spent physically present in South Africa over a specific period – it can unintentionally re-trigger tax residency.

This comes with all the tax obligations associated with SARS, Fraser and Mahlaba explained.