New tax rules for emigrating South Africans – what you need to know
National Treasury has published the Taxation Laws Amendment Bill for public comment, which will affect South Africans looking to emigrate.
Although the new amendments won’t change much for the average taxpayer, expats – specifically those who cease their tax residency in South Africa for tax purposes – will be affected.
According to Thomas Lobban, Head of Cross-Border Tax at Tax Consulting SA, the most notable changes will be seen in the rules relating to retirement funds and tax-free savings account contributions.
Concerning local retirement funds, a taxpayer can claim a tax deduction for contributions – limited to 27,5% of their taxable income, or R350 000 – every tax year.
A taxpayer can also contribute R36,000 to a tax-free savings account each year, which – as the name suggests, – is tax-free. As long as the taxpayer remained within the contribution limits, all gains in these investments are also treated as tax-free.
Tax Residency
Before understanding the changes, Lobban said that understanding what ceasing tax residency means.
“When a taxpayer ceases to be a resident of SA for tax purposes, the South African Revenue Service (SARS) requires them to formalise this change,” he said.
“In essence, they go from being a person who is liable to tax in South Africa on all worldwide amounts, to being liable to tax only on amounts that arise from a source in SA. SARS must confirm one’s non-resident status following an application by the taxpayer – i.e., it is not automatic.”
South Africa has seen a recent exodus of taxpayers, with many ceasing their tax residency due to crime, load shedding and improved opportunities abroad. That said, the South African taxman has made several changes to the laws to target expats.
The split
Crucially, when a person ends their tax residency, their 12-month tax year splits into two: the portion that they were a tax resident and the portion when they were not.
“For example, if one ceases to be a tax resident on 1 June 2022, their tax year of assessment as a tax resident would have begun on 1 March 2022, but would be deemed to have ended on 31 May 2022 (i.e., a 3-month year of assessment as a South African tax resident),” Lobban said,
“Their tax year as a non-resident began on 1 June 2022 and ended on 28 February 2023 (i.e., a 9-month year of assessment as a tax non-resident). Both tax years (the 3-month and 9-month periods, respectively) fall within a single 12-month tax period.”
Although the taxpayers still only make one tax return for the (12-month) tax year, SARS considers both periods in regard to local retirement fund and tax-free savings account contributions.
National Treasury said that the new amendment will address the anomaly created by the split-year period for taxpayers who end their tax residency.
Currently, a taxpayer could contribute up to double the annual allowable contribution limits in the year that they ended their tax residency – doubling these benefits from a tax perspective.
“In practice, however, the current tax return form on e-Filing, and of course SARS in determining the tax payable by a taxpayer, has not taken these doubled-up contribution limits into account. Perhaps certain non-resident taxpayers should, therefore, rightly wonder whether SARS currently owes them a refund,” he said.
Still, National Treasury has proposed that contributions made to a local retirement fund or tax-free savings account in the year that the taxpayer ends their residency will be capped from 1 March 2024.
The new limits will be based on the ratio of days in that tax period (i.e., pre-, or post-cessation) against the full tax year’s 365 days.
“While these changes may hinge on the technicality of counting your days, it remains crucial for expat taxpayers to understand the practical ramifications – especially those who intend to cease their South African tax residency and have not pulled the trigger on it just yet,” Lobban said.
“Where the prudent due diligence route is not followed, and the first mover advantage is lost, the benefit of aligning with the tried and tested formula is lost, meaning there is no guarantee of a predictable outcome from SARS.”
Public comments for the Taxation Law Amendments are due 31 August 2023:
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