Tax planning secrets when leaving South Africa
If you’re considering leaving the country, it’s never too early to start planning. By thinking ahead, you can reduce your tax burden and avoid unexpected penalties.
Break your tax residency – intentionally
South Africa has a residence-based tax system which means that when you are considered a tax resident, you can be taxed on your worldwide income even if you’ve physically left the country.
Tax emigration, the process of breaking your tax residency with SARS, is therefore different from changes in your citizenship and the old financial emigration process through the SARB, and it’s possible to do it accidentally.
SARS determines tax residency based on two tests: the physical presence test and the ordinary residence test.
The physical presence test measures how much time you spend in the country and the ordinary residence test looks at where your home base is – including factors such as where your family is situated.
An easy way to accidentally break your tax residency is to spend more than 183 days outside of South Africa in a single tax year and triggering residency under another country’s tax laws. This can have financial planning consequences as it can affect your investments. More critically, breaking your tax residency will trigger a Capital Gains Tax (CGT) event (sometimes called “exit tax”) and failure to pay this tax, which immediately becomes due upon exit, could result in penalties and a bigger bill down the line.
On the other hand, not breaking your tax residency could result in you owing tax on the same income in two separate jurisdictions as only the first R1.25 million of foreign earnings is exempt from double tax (“expat tax”) in SA, not to mention the complexities of selling foreign assets later and owing SARS a piece of the pie.
You want to ensure that you control when and how you break your tax residency.
Looking at leaving SA? Don’t go without the proper advice. Speak to the experts free of charge at the Global Citizenship and Emigration Expo, taking place in Pretoria, Johannesburg, Mbombela, Hermanus, Cape Town and Paarl from 28 October – 7 November. Find out more.
Minimising your exit tax
As mentioned previously, when you tax emigrate, this triggers a CGT event. You are deemed to have sold your worldwide assets (with few exceptions) to your foreign self. As you can imagine, this can be quite a hefty tax bill to pay if it’s unplanned. Fortunately, there are a few strategies you can use to bring down this amount.
Leave early in the tax year
In South Africa, Capital Gains is added to your other taxable income for the year proportional to the tax bracket you’re in. By planning your exit for early in the tax year, that taxable amount will be lower and therefore the percentage of CGT you pay will be lower than if you left later in the year.
However, SARS is trying to limit this benefit by reducing the rebates allowed to taxpayers, so double check your situation with a tax professional in case the tax laws change detrimentally in the future.
Sell off your assets well in advance
If you have a number of assets that will trigger CGT on exit, it might be a good idea to sell them before you leave and reinvest the profits once you are in your new jurisdiction.
If you spread these sales over a few tax years, this can have the dual benefit of keeping your exit tax low and making things simpler in future.
It’s important to note that as “exit tax” is only a deemed sale, it can’t be used as a tax credit in your new tax jurisdiction. This means that when you wish to sell an asset later, after you’ve left, you will most likely have to pay additional CGT on it, and this might be at a higher rate than you would have paid in SA.
Ideally, you want to avoid selling off all of your assets in a single tax year, so the sooner you start planning the better.
Understand which assets will trigger exit tax and plan accordingly
Before you make any big decisions around selling your assets, bear in mind that certain assets are exempt from exit tax but will not be except from Capital Gains once you’ve left. For example, immovable property in South Africa.
It’s important to get advice both in South Africa and in the jurisdiction that you’re moving to to adequately plan for the future, as some tax jurisdictions allow you to sell SA immovable property and don’t tax it if sold within a certain time period.
What about trust(s)?
We often get asked if you can move your South African trusts abroad when you leave. The short answer is “no”. Trusts do not exist everywhere. In light of this, you need to be aware of the taxing rights within the trust:
- Capital Gains: The distribution of a capital gain to a non-resident beneficiary is taxed differently from to a resident beneficiary. A non-resident beneficiary will be taxed in the trust’s hands, currently at an effective rate of 36%.
- Income Tax: From March 1, 2024, if a non-resident beneficiary has a vested right to income, that income will be taxed in the hands of the trust. This is currently subject to a tax rate of 45%.
This means that both income and capital gains derived from a South African trust and distributed to non-resident beneficiaries are now subject to the same tax regime, with the trust being responsible for the tax liability.
If you plan ahead, it may be possible to mitigate some of these issues by restructuring your trusts into other common vehicles, including offshore feeder funds, asset swaps or endowment policies.
Get in touch with Sable International’s Wealth team to find out more.
Avoid double taxation
It’s possible that you will be considered a taxpayer in multiple jurisdictions when you leave South Africa.
South Africa has Double Taxation Agreements (DTAs) in place with over 80 countries (including the UK, Australia, USA and UAE) that determine who has the right to tax you under these circumstances, to avoid you having to pay tax on the same income twice.
These agreements vary from country to country, which is why it’s essential to get tax advice both in South Africa and in your new country before you leave so you can understand what your tax obligations will be, when you should file and any limitations of the DTA that you need to be aware of.
We recommend that you start seeking this advice 6 – 12 months before making your exit to ensure you have time to prepare.
Sable International offers comprehensive tax services and advice for South Africans at home and abroad. Our services range from international tax guidance, to tax emigration, SARS correspondence and returns.
Before you start planning your exit, get in touch with our team at [email protected] or give us a call on +27 (0) 21 657 1517 and we’ll be happy to set up a consultation.
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