To emigrate or not to emigrate, that is the question.
William Shakespeare was widely regarded as the the greatest writer in the English language and the world’s pre-eminent dramatists.
The Tragedy of Hamlet, Prince of Denmark, often shortened to Hamlet, was written by Shakespeare somewhere between 1599 and 1602 and is considered among the most influential works of world literature.
To be, or not to be, that is the question:
Whether ‘tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,
Or to take Arms against a Sea of troubles,
And by opposing end them: to die, to sleep.
In this scene Hamlet contemplates death and suicide, bemoaning the pain and unfairness of life but acknowledging that the alternative might be worse. Regrettably, it is widely known that both death and taxes are depressingly unavoidable. Thankfully unlike our ultimate and hopefully peaceful demise we can fortunately plan our taxes.
The recent proposed changes to the taxation of foreign income earned by South Africans that work overseas has put financial emigration in the limelight. It remains to be seen whether the proposal will be enacted.
Section 10(1)(o)(ii) which grants tax exemption for foreign employment income, is to be amended with effect from 1 March 2020, by limiting the exemption to the first R1 000 000 of foreign remuneration income. This means that if a South African resident was previously earning foreign remuneration for work done outside the Republic during a 12 month-period, during which he or she was outside the Republic for more than 183 full days in aggregate and more than 60 full days continuously, the tax exemption on this income will fall away to the extent that the income exceeds R 1 000 000 in the year of assessment. The resident will pay South African tax on his ‘excess’ income and be entitled to the foreign tax on that remuneration as a section 6quat credit. It seems that even though the first R 1 000 000 will be tax free, if there is any excess that is taxed, the foreign tax on the first R 1 000 000 can possibly still be claimed as a tax credit under section 6quat. This will be clarified in due course.
Financial emigration is a formal process with the South African Reserve Bank (SARB) to change you tax status from “resident” to “non-resident” for exchange control purposes. It does not require giving up citizenship, selling property or cancelling bonds and financial products. This is done in order to give legal certainty regarding non-residency tax status for tax and exchange control purposes. It also holds certain financial planning benefits such as being one of the few ways of cashing out retirement annuities.
Non-residents will not be required to pay any South African tax on their worldwide income. Normal source rules will however still apply to South African sourced income such as rental income received from property situated in the Republic.
Financial emigration gives rise to a deemed disposal of certain assets for Capital Gains Tax purposes, but after that you are exempt from Capital Gains Tax and estate duty in South Africa. This only applies to certain assets, excluding fixed property. The capital gain triggered before emigrating to a non-South African tax resident may however create cash flow challenges.
The example below explains potential tax implications:
Mr. Jones (younger than 65 years) earns R3 million per annum as foreign remuneration. He was outside South Africa for more than 183 full days in aggregate and more than 60 full days continuously within a 12 month period. Mr. Jones owns assets (e.g shares and unit trusts) worth R8 million. The total cost price of these assets were R2 million.
When considering tax emigration from South Africa, professional advice regarding the following is required: the tax rate of the country you are emigrating to, the exchange rate of South Africa vs the country you are emigrating to as well as Capital Gains Tax obligations. If emigrating to a tax haven where foreign income is exempt and your Capital Gains Tax obligation is not too high, tax emigration might be a consideration.
Like Hamlet sorely bemoaned the pain and unfairness of life, we often bemoan the pain and unfairness of the South African tax system. We constantly look for alternatives and this might include financial emigration. But like Hamlet we might come to the conclusion that the alternative might be worse.
Article by C2M Director, Carel Steenkamp CA (SA) RA. For more information email firstname.lastname@example.org.