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Financial emigration is a formal emigration process which means your status with the South African Reserve Bank changes from resident to non-resident for exchange control and tax purposes.
You cannot lose your South African citizenship if you emigrate financially, thus no need to give up your passport, and you can return to live in SA at any time.
Current exchange controls:
You can now transfer R11m annually by using your foreign capital allowance of R10m and single discretionary allowance of R1m. These allowances are available to taxpayers in good standing over 18 years of age.
SARS and Capital Gains Tax:
Financial emigration triggers “exit charges” in the form of capital gains tax (CGT). You’re deemed to have sold your assets on the day before you leave. This rule exists as the taxman forfeits the opportunity for income on the gain of the investments when you’re a non-resident. Currently, 40% of the gain is included in your income and taxed at your marginal tax rate.
Immovable property (including your home or commercial property) is excluded from these “exit charges” as the taxman will get his slice of the pie in the form of a withholding tax when you sell these as a non-resident.
If it makes good sense to emigrate for income tax purposes and the “exit charge” is prohibiting you from doing so, do remember that CGT always applies – when you pass away, for example, you’re also deemed to have sold your investments. So somewhere along the line you are going to pay. Either living or dead.
Since tax systems differ from country to country, there is a chance that an amount could be taxed twice. This possibility of double taxation is, however, often alleviated by tax relief contained in various Double Taxation Agreements. These DTAs are international agreements contracted between countries to deal with potential competing taxing rights against the income of the same taxpayer.
DTAs are important for encouraging investment and trade flow between nations. South Africa has DTAs with several other countries with a view to, amongst other things; preventing double taxation of income accruing to South African taxpayers from foreign sources, or of income accruing to foreign taxpayers from South African sources.
Will you be taxed as a Non-Resident?
Although South Africa taxes residents on their worldwide income, taxpayers who are non-residents will be taxed only on their income that is sourced in South Africa (such as interest on capital invested in a local bank; or rental income generated from a fixed property situated in South Africa).
A distinction therefore needs to be made between a resident and a non-resident for tax purposes. In addition, certain tax exemptions are afforded to residents and non-residents. For example, any amount of interest received by or accruing to a non-resident will be exempt from tax in South Africa, provided certain criteria have been met.
When are you a Non-Resident?
Let’s start by defining what we mean by “resident”. Understanding that, you will know whether you meet the criteria or not and thus whether you can be regarded as a resident or a non-resident.
Under South African law there are different types of residents, for example a resident defined by the Income Tax Act, 1962 in terms of the so-called “physical presence test” and an ordinary resident defined in terms of South African common law.
Any individual who is ordinarily resident (common law concept) in South Africa during the year of assessment or, failing which, meets all three requirements of the physical presence test, will be regarded as a resident for tax purposes.
An individual will be ordinarily resident in South Africa, if South Africa is the country to which that individual will naturally and as a matter of course return after his or her wanderings. It could be described as that individual’s usual or principal residence, or his or her real home. If an individual is not ordinarily resident in South Africa, he or she may still meet the requirements of the physical presence test and will be deemed to be a resident for tax purposes.
To meet the requirements of the physical presence test, that individual must be physically present in South Africa for a period or periods exceeding –
- 91 days in total during the year of assessment under consideration;
- 91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
- 915 days in total during those five preceding years of assessment.
An individual who fails to meet any one of these three requirements will not satisfy the physical presence test. In addition, any individual who meets the physical presence test, but is outside South Africa for a continuous period of at least 330 full days, will not be regarded as a resident from the day on which that individual ceased to be physically present.