For the many South Africans living abroad, the proposed changes to the Tax Laws effective as of 1 March 2020, could have some serious implications.
The first tax alert is that if you earn more than R1 000 000 per annum (converted at 25/04/2019, approximately USD69 000, GPB 53 000, AUD100 000 or NZD98 500).
For those living in the day and simply thinking of the current, Income tax on ‘excess earnings abroad’ is the immediate issue.
You will pay tax on the excess based on your effective tax rate applied to worldwide earnings. There could even be double taxation (from South Africa and also the country that you work in) and the excess income for the government revenue services. We all wait anxiously on the Double Tax Agreement, which exist between South Africa and the country in which the taxpayer is working. It seems however clear that excess earnings could be subject to ‘more taxation’…
It is still to be seen how this arrangement will work in all alliance countries. Currently SARS have the ability to access taxpayer’s bank account and debit any amounts due. This would make for an unpleasant surprise for a person sitting in Perth, Singapore, Montreal or any country that is an alliance member around the world.
This has prompted an interest in financial emigration which essentially changes your “SARS status” as no longer being a resident in South Africa. By doing this, you are no longer taxed on worldwide income, only income made in South Africa (if any). You still keep your passport and the main privileges associated with.
The second tax alert and possible the Knock-out Blow. When South Africans living and working abroad decide to financially emigrate, they effectively end their tax identity as a resident of South Africa. At this point, formal financial emigration triggers a deemed sale of all assets and any potential gains are subject to CGT and again subject to SARS.
Trust Distributions
Some clients are linked to South African trusts, whose beneficiaries are emigrating. Best to vest from the trusts before beneficiaries emigrate, because distributions which include capital gains will be taxed at effective tax rates that are double or more…
Imagine being a 45% taxpayer and incurring CGT at 18% in your own capacity on any capital gains arising from proceeds of sale of trust assets that have been vested to you as a beneficiary of the trust. The alternative is that you emigrate and become a non-resident. Here the trust is taxed on the gains at an effective 36%. That’s double the tax for not planning well.
This is one of many challenges that arise and the wealthier that you are, the heavier the potential knock.
Other Complexities
Financial emigration can become complicated by tax factors that may be unique to each client. Some have assets in South Africa which they want to keep, others have assets which they wish to sell; some have business interests, or retirement products, or are linked to trusts. Here good tax planning prior to the financial emigration process is vital.
Conclusion
For many, it is a choice of when to financially emigrate and not whether to financially emigrate. The good news for those who left the country some time back, financial emigrations are currently being back-dated. This option may not exist forever.
In the light of the above, we strongly encourage action with a view to cleaning up complexities and residential links. At ACS Plus we pride ourselves on expert advice, client focus and building trust. We know our clients’ achievements translate directly into our own success and have traditionally grown by word of mouth.
For more information please contact ACS Plus.
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