Financial emigration or tax emigration from South Africa

South Africans living and working abroad should ensure that they have complete clarity as to their current tax status prior to the imminent changes to how foreign employment income of South African tax residents will be taxed from 1 March 2020 – the so-called ‘Expat Tax’.

Under the current rules, South African tax residents working abroad are entitled to a tax exemption from income earned abroad, provided they are physically outside South Africa for 183 days in aggregate during any 12-month period, of which at least 60 days must be continuously spent outside SA.

If both requirements are met, South African tax residents can claim a tax exemption from the income that relates to employment services rendered outside of SA, irrespective of whether the employment relationship is with a South African or foreign employer. However, the taxpayer must still declare the foreign-sourced income on a South African tax return and claim the relevant tax exemption.

Under the new rules, applicable from 1 March 2020, only the first ZAR1 million earned from foreign service income will be exempt from tax in South Africa under the same conditions. As a result any foreign service income above the first ZAR1 million will be taxed in South Africa at the relevant marginal tax rate of the tax resident.

Many financial advisors have been advocating that South African tax residents working abroad need to ‘financially emigrate’ in order to escape the ‘expat tax’. But this is not the case for everyone.

Electing to formally emigrate from a financial perspective from South Africa requires approval from the South African Reserve Bank. Financial emigration may be advisable for true emigrants, who do not intend to return to SA. It will allow them to access and transfer financial assets out of the country to a destination of choice. These include retirement annuities, future inheritances and passive income.

However an individual’s SA tax residence is not automatically broken when he or she financially emigrates. The deciding factor remains whether or not an individual breaks his or her ordinary residence. Financial emigration is merely one factor that may be taken into account in determining this.

So before rushing into financial emigration, the first step should be to assess your tax status. Although the foreign income of South African tax residents working abroad has been tax exempt in the past, it should have been declared to the South African Revenue Service (SARS). If you are deemed to be non-tax resident in South Africa, this obligation falls away.

It is only when the individual is neither ordinarily resident nor meets the 330 consecutive days physical absence from South Africa test that he or she will be regarded as a non-resident for tax purposes and his or her foreign income will not be subject to South African tax.

This means that many South Africans who have been living and working abroad may already be regarded as non-South African residents for tax purposes. Falling outside the ordinary residence definition, or if you are tax resident in a country that has a double tax treaty (DTA) in place with South Africa, you are deemed to be a tax non-resident in South Africa.

Taxpayers who are non-residents will be taxed only on income that accrues to them in South Africa. They will pay an exit tax (capital gains), but their foreign income in excess of ZAR1 million will no longer be taxed. This means that there’s no necessity to financially emigrate – all a taxpayer needs to do is ensure they remain tax resident in a country that has a DTA with South Africa.

There are steps that you can take to ensure tax migration happens. If you are working in a treaty country, you should ensure that any your family or holiday homes in South Africa are rented out permanently. The treaty tiebreaker test will then always favour the new country and prevent SARS from taxing your expat income.