How the “expat tax” could affect you

As of 1 March 2020, South African residents working abroad may face an increased tax bill. What do the changes really mean and how will they impact you?

Stephen Katzenellenbogen CFP®

Stephen Katzenellenbogen CFP®

Senior Executive and Private Wealth Manager

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How the “expat tax” could affect you

This “expat tax” has raised quite a stir; it even has its own hashtag: #TAX2020. What do the changes really mean and how will they impact you?

What  was the legislation?

Prior to 1 March 2020, a South African tax resident working and earning abroad would be exempt from normal tax on such earnings in South Africa in terms of Section 10(1)(o)(ii) if:

  • they worked abroad for a period or periods exceeding 183 full days in aggregate during any 12 months period and;
  • for a continuous period exceeding 60 days during that 12-month period and;
  • those services were rendered during that period.

What changes are going to be made?

From 1 March 2020, the exemption will be limited to R1.25 million. Any foreign employment income earned over and above this threshold will be taxed in South Africa, applying the normal tax tables for that particular year of assessment.

Importantly, the amendment to the ITA will only be applicable to you if you’re a South African tax resident.

How do I know if I’m a South African tax resident?

You’re a tax resident if:

  • you’re ordinarily resident in South Africa (basically if this is where your real home is); or
  • meet all the requirements of the physical presence test (physically present in South Africa for more than 91 days during the year of assessment, more than 91 days during each of the preceding five years, and 915 days in total over the preceding five years); and
  • are not deemed to be exclusively a resident of another country for the purposes of the application of any tax treaty.

How do I give up my South African tax residency?

If you don’t comply with the requirements to be regarded as a tax resident, you will have broken your tax residency in South Africa and the amendments will not be applicable to you.   

However, to give up your South African tax residency, you need to inform the South African Revenue Service (SARS) because you may be liable for capital gains tax.  It is important that this capital gains tax is calculated and disclosed in a timeous manner to fulfil the necessary compliance requirements. There are certain exemptions for the purposes of this calculation. Proper planning for the cessation of your South African tax residency is essential to ensure that no double taxation takes place or that you do not become guilty of non-disclosure in one or both of the jurisdictions.

What’s the difference between giving up tax residency and financially emigrating?

Giving up your tax residency means you are considered a non-resident for tax purposes. In other words, you’re treated the same as someone who’s never been resident in South Africa. You’ll therefore not be affected by the expat tax.

Financial emigration (or emigrating for exchange control purposes) requires a formal submission to the South African Reserve Bank (SARB), after which you’ll be granted a letter from the SARB approving your emigration. Doing this will change your residency status to “emigrant” but doesn’t necessarily change your tax residency status with SARS. If you don’t go through this process, you’ll still be regarded as an exchange control resident. This means you’ll still need to comply with certain exchange control regulation which governs how much and under which circumstances you can move money out of South Africa.

This is set to change by next year though. The government plans to phase out financial emigration by March 2021 which will make it easier for South Africans to live and work abroad, and make it easier to return back to S.A. At the same time, the authorities plan to strengthen the rules around tax treatment; individuals who transfer more than R10.0m abroad will be subject to a verification process that includes certifying your tax status, and the source and legitimacy of your funds.

What’s the best option for me?

There is no one-size-fits-all answer. What’s suitable for one person may be unsuitable for another. At NFB Private Wealth Management we can give you proper advice on how to apply the above to your specific circumstances in a tax efficient manner, so please get in touch with us.

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