In emigrating, many South Africans don’t prioritise sorting out their tax affairs, and then run into complicated issues with the South African Revenue Service (SARS), notes William Louw, professional tax practitioner and director at Sable International.
When you permanently emigrate from South Africa, you should inform SARS that you are no longer tax resident. The sooner you do this, the better for you in the long run, he said.
Where you pay tax, and the amount you pay, is determined by your home country. In cases where you earn foreign income, it also depends on Double Taxation Agreements (DTAs) that your country has with other countries, which often protect you from having to pay tax twice on the same income.
In South Africa’s case, the tax system is residency-based. This means that if you are considered a tax resident here, you should (in most cases) be paying your tax to SARS, even on worldwide income. If you’re living in South Africa, that’s uncomplicated.
However, tax residency isn’t the same as physical residency and it is possible to remain a tax resident of SA while living somewhere else.
How SARS determines tax residency
SARS conducts two “tests” to determine your tax residency status: How present you are in South Africa and whether there are indications that you might be “ordinarily resident” in South Africa, even while living and working overseas.
If you’ve emigrated from South Africa and haven’t spent more than three months in any of the past five years in the country, you will not be considered physically present in South Africa. However, the ordinarily resident test is subjective – SARS can look at factors like where your family lives, where your belongings are stored and where you own a home.
If SARS determines that you are non-resident in South Africa for tax purposes, you are only liable to pay tax in South Africa on income earned in South Africa and not on your worldwide income.
If you are determined to be tax resident in South Africa, but you spend more than half the year overseas, for two months or more at a time, you are exempt from paying South African tax on that worldwide income up to a threshold of R1.25 million.
Many South Africans who have emigrated, but earn under the threshold, do not see a point in informing SARS when they become tax resident in another country. “While it may seem like a good way to avoid paying exit tax (the Capital Gains amount that becomes due when you tax emigrate), putting off tax emigration can cause bigger problems down the line,” Louw warned.
SARS knows more than you realise
When you leave SA permanently, you’re meant to inform SARS in your next tax return. Until then, SARS has the right to assume that you are still a South African tax resident. Most banks report their cash flows to SARS. When SARS sees a South African ID number and tax number that’s not correctly coded or inactive, SARS can then demand you pay tax owed, said Louw.
These “jeopardy assessments” can happen at any time in the tax year, without notice, as they’re usually triggered when tax authorities believe you are engaging in tax evasion.
“In order to avoid paying this amount, you need to lodge a return to override it, including supporting documents that prove that you are no longer tax resident in South Africa. If this appeal is successful, you become liable for exit tax and penalties for not informing SARS when you left and paying your exit tax at that stage,” he said.
Getting your RA out of South Africa
On 1 March 2021, the process for transferring a retirement annuity or pension out of South Africa changed. Now, if you want to transfer your retirement annuity out, you need to prove to SARS that you have been tax resident in another country for three years.
“If you have already tax emigrated, then this is not a problem, but, if you haven’t, you will effectively be alerting SARS and you will become liable for exit tax and penalties. If you try and encash your RA and you have not changed your tax status with SARS already then the RA encashment will fail even if you have a valid tax emigration tax clearance certificate.
“So basically SARS will not allow the RA to be paid out and it is likely that an audit will be started immediately which removes most of the protection of the VDP,” said Louw.
Double (taxation) trouble
To avoid tax evasion, money laundering and other unsavoury practices, tax authorities around the world communicate with each other. If SARS suspects you’re not paying the tax you should, they will approach the tax office in your new country of residence, Sable International said.
This tax authority might believe that you intentionally avoided changing your tax residency status in South Africa to take advantage of a DTA and get out of paying tax that should have been owed to them. In which case, they’ll audit you, it said.
“Even if you have been paying all tax owed, you will need to prove this. And if you haven’t been paying the tax you should, you’ll be liable for more penalties.”
No going back
Two changes in the pipeline could mean it will become more difficult for South Africans who didn’t tax emigrate when they left South Africa to make things right. Currently, you’re able to confess to SARS under the Voluntary Disclosure Programme (VDP). If you come forward to admit that you have been non-compliant before SARS discovers it for themselves, you don’t have to pay penalties, said Louw.
“Through this programme, we have been able to help our clients tax emigrate without consequences, even when they’ve lived outside of South Africa for years.”
As things stand, a tax professional can help you provide proof of the date that you left South Africa, so that the Capital Gains Tax that you owe is based on the asset base you had at that time and not your current asset base. This is referred to as “backdating” a tax emigration.
There is speculation among tax practitioners that SARS is looking to remove the ability to “backdate” a tax emigration. So, your tax emigration will only be effective from the date you declared it and you will have to pay Capital Gains Tax on your current asset base, which might be worth more than when you left South Africa.
Government states that in the 2021 South African Budget, that it will be reviewing the voluntary disclosure provisions. There is no indication yet of what might change about the programme, but there is no guarantee that you will still be able to use it to avoid paying penalties in the future, said Sable International.
The process you should follow
“If you haven’t left South Africa yet, plan ahead to ensure that you report your tax status change with your next tax return. Make sure you keep documentation to show when you left South Africa, such as a tax residence certificate from your new country of residence and proof of a foreign address,” said Louw.
Calculate and plan ahead for the amount of Capital Gains Tax you will have to pay, said Louw. “You should also prepare for the residency tests that SARS will conduct by making sure that you spend enough time outside of South Africa and that you don’t have remaining ties in South Africa that could indicate you’re ordinarily resident in the country.
If you’ve already left South Africa and have not informed SARS that you are no longer tax resident in the country, we recommend that you do so sooner rather than later while you are still able to make use of the VDP, he said.