From 1 March 2001, South Africa moved from a source-based to a residence-based tax system for individuals. This meant that tax residents would be subject to tax on worldwide income (excluding certain exemptions or exclusions) and non-residents would be subject to tax on income from a source within South Africa. This created a clear distinction which must always be considered. When you cease to be a taxpayer (i.e. death/emigration), then worldwide net assets are subject to tax.
The CGT Event on Worldwide Assets
When South Africans emigrate, all worldwide assets are deemed to be sold on the date of emigration. Confusion exists because the MP336 form looks at current South African assets. This form is used by SARS (South African Revenue Service) and SARB (South African Reserve Bank). In some instances, SARS and SARB rely on this and SARS applies CGT on current values if there is a capital gain on deemed disposal. This would occur when a South African Taxpayer emigrates from SARS - today (the current).
However recent interest shows most expats left many years prior and because tax emigration is a factual event, often the information that SARS relies on is a listing of assets and liabilities on the date of emigration – back then. Further, SARS would also be interested in South Africans that have worldwide assets in the current (which are not reflected on the MP336 form).
I guess the weakness in the current system is that both SARS and SARB rely on the same form. SARB actually use this to work out the value in Rands that a newly converted Non-resident is entitled to have transferred abroad. It does make sense that SARS have wind of declared net assets, in case of huge discrepancies between what a person was taxed on during formal emigration and what that person is looking to transfer out of the country.
Tax Planning – The Year of Emigration
In my mind, I look at this year in three parts.
1. A South African Taxpayer (South African resident up to emigration date);
2. Emigration date; and
3. Non-resident from emigration to the end of that tax year.
Often, the first part of the tax year is dedicated to being a South African resident and from the date of emigration onwards, the latter part of the year is one for non-resident status individuals. For this reason, you need to think with both caps on.
A South African Taxpayer
The first part of the year may be influenced by the 183 days rule, with 60 days of consecutive time out of South Africa - as eluded to in the budget. Here in South Africa considering formal emigration, but being paid in South Africa, through payrolls – might hope to recover the payroll taxes deducted and paid to SARS for the part of the year up to emigration date.
This idea is correct but often meets with real challenges at SARS – some being down to the coding used on payrolls for the income that you receive as an employee of a company… Planning is needed and I suggest speaking to experts who have experience with this.
Part 2 – Emigration Date
The emigration process gets you to non-residency and this status allows for tax treatment of your profile to be different from the first part of the year. Naturally, the emigration date is the date of the deemed disposal of assets and brings with it a potential capital gains tax event, addressed earlier.
Part 3 – Non-Resident
Thereafter, as a non-resident, the taxpayer has changed his abode. Naturally, the new domicile has its own taxes that need to be considered and planned for. Of interest is if he/she continues to have interests in South Africa. The property, business, retirement products etc. Such interest will attract South African tax. Generally, any income in South Africa will be taxed in South Africa. Any Capital gains on future disposal of assets will have a higher base cost (that from the ‘deemed disposal’ on emigration date).
The difference is that Worldwide income is excluded and so are worldwide assets. SARS interest becomes the South African assets and the income derived from these.
Comments