While financial emigration may be a viable option for a small minority of individuals who will be hit by South Africa’s coming ‘expat tax’, for the majority, it’s likely to be a costly exercise which won’t provide significant tax relief in the long-term.
This is according to Ettiene Retief of the South African Institute of Professional Accountants (SAIPA) who said that recent news reports have provided conflicting – and even wholly inaccurate – information around the implications for expats to the scheduled March 2020 change to the Income Tax Act.
“Financial emigration is the process whereby taxpayers change their status with the South African Reserve Bank (SARB) from resident to non-resident,” he said.
“It’s a process conducted purely for exchange control purposes, but which does not affect your citizenship status in any way.”
Emigration, on the other hand, is a very different process as it involves physically relocating from one country to another country either in the short or long term, said Retief.
Once emigration has become a permanent status, the process of financially emigrating – during which time the individual’s assets move from their old country of residence to their new country of residence – takes place, he said.
“The mistake many people are currently making is that they are expecting financial emigration to resolve their issues around paying tax in South Africa on income earned abroad, a so-called ‘expat tax’.
“The reality, however, is that financial emigration, for most individuals, won’t provide material tax savings,” he said.
Once the amendments to the Income Tax Act come into effect in March 2020, South African tax residents working abroad will only be exempt from paying tax on the first R1 million they earn abroad. Thereafter they will be required to pay tax on any foreign earnings.
The revised act does, however, make provision for expats working abroad who are registered for tax in those countries, said Retief.
In these instances, the act allows those individuals to apply for credits in South Africa which are offset against the tax they owe locally, with the tax rate starting at the lowest rate, he said.
“The reality, therefore, is that South Africans working abroad will in most instances not be significantly negatively impacted by the changed regulations and will still not be double taxed.
“The only individuals that will be detrimentally impacted are those earning very large amounts offshore and even in these instances, they will still only be paying the same amount of tax they would have been paying in South Africa in any event.”
What’s important to understand is that to all intents and purposes the law has not changed but has instead just corrected a loophole, said Retief.
“South African residents who work abroad permanently and spend the majority of their time living abroad would already be considered non-residents from a tax perspective. Remember that it is possible to change your tax residency without having to financially emigrate.”
What recent news reports – those encouraging individuals to emigrate financially in order to avoid the expat tax – have failed to reveal is that financial emigration is an expensive exercise, said Retief.
He added that there is a huge tax implication involved in changing an individual’s tax residency.
“By financially emigrating an individual is deemed to have disposed of all their assets in South Africa, which means that capital gains tax starts applying. Should the individual decide at some future point to financially emigrate back to South Africa, the individual would not get that money back.
“To avoid South African taxation rules, an individual would need to first change their tax residency. Financial emigration is the very last step – and even then, it’s not an essential part of an amended tax residency given that it is only an exchange control provision.
“Emigration and financial emigration only comfortably overlap when a taxpayer is legitimately emigrating. The latter doesn’t work if the individual intends to continue residing in South Africa,” he said.