Topical Issues

Financial emigration from South Africa – To do or not to do?

Introduction

In terms of section 10(1)(o)(ii) of South Africa’s Income Tax Act No. 58 of 1962 (the “Act”), South African residents are entitled to an exemption from income tax in South Africa in respect of remuneration received or accrued in respect of services rendered outside of South Africa. In order to qualify for the exemption, certain requirements (mainly relating to periods of absence from South Africa) must be met.

Requirements of section 10(1)(o)(ii) of the Act in more detail

In order to qualify for the section 10(1)(o)(ii) exemption, the relevant services must be rendered by the South African resident as an employee on behalf of an employer and must be rendered outside of South Africa (only remuneration in respect of foreign services qualifies for the exemption, which does not apply to exempt other income of the South African resident). Critically the South African resident must be outside of South Africa for a total of more than 183 days during any 12-month period and 60 of these 183 days must be consecutive days.

The section 10(1)(o)(ii) exemption was originally introduced in 2001 as part of the legislation that introduced the residence basis of taxation to South Africa. At the time of its introduction, it was stated that, internationally, it is accepted practice to exempt foreign employment income of a resident if the resident was outside of his or her country for a period exceeding 183 days in the relevant tax year of assessment.

In other words, in terms of section 10(1)(o)(ii) of the Act as it currently stands, if a South African resident is working overseas and he or she does not meet the physical presence requirements to be considered an ordinary resident in South Africa, he or she is exempt from tax in South Africa on any foreign income.

Proposed changes to section 10(1)(o)(ii) of the Act in more detail

On the 19 July 2017, South Africa’s National Treasury released the Draft Taxation Laws Amendment Bill, 2017 for public comment. One of the more controversial proposals in the draft bill was the proposal that section 10(1)(o)(ii) be repealed in its entirety. Were this to happen, all foreign income earned by South African citizens would be subject to tax in South Africa and these citizens would have to claim a credit against South African income tax payable for any foreign taxes that were paid on the foreign income.

The draft regulations were later softened to not be a complete repeal of section 10(1)(o)(ii), but they now stipulate that the section will be changed so that only the first R1 million of foreign remuneration will remain exempt from tax in South Africa even if an individual meets the requirements of exemptionin full. One of the main reasons given for the changes is to curb situations of double non-taxation, being situations in which an individual’s employment income is not subject to tax in either South Africa or in the foreign country where the services are rendered.

Who does it affect

The proposed changes will affect all South African employees who are earning an income in excess of R1 million per annum overseas in a particular tax year of assessment. It will also impact companies that send employees overseas for work, who will have to deal with the new tax implications.

South Africans who have permanently left the country but who have not settled their tax affairs through financial emigration may also be subject to the changes, depending on their individual circumstances.Anyone who is travelling and working abroad and who currently qualifies for exemption under section 10(1)(o)(ii) of the Act will remain exempt from tax in South Africa after the 1 March 2020 provided they earn less than R1 million in the relevant tax year of assessment. However, should they earn more than R1 million in a particular tax year after this date, they will be subject to tax in South Africa on the income that they receive in excess of R1 million at tax rates up to and including 45%. They will however receive a credit for any foreign tax that has been deducted from their income in the foreign country in which they reside.

Is financial emigration necessary?

Financial emigration is the legal process of cutting all tax ties to South Africa. However, it may not be necessary to avoid the tax inherent within the repeal of section 10(1)(o)(ii) provided you meet the right requirements. For example, if you are a non-resident South African such as a South African living abroad and you can prove to SARS that you are ordinarily resident in the country that you are living in, then the tax should not apply to you. If you are in a dual-residency situation, the South African Revenue Service (“SARS”) may have a double taxation agreement (“DTA”) with the country you are living in that may make you exempt from tax in South Africa.

It is important to note that financial emigration considerations are specific to each individual situation with no real general exemption that applies to all expatriates outside the section 10(1)(o)(ii) limits. For this reason, a significant number of people are currently considering the option of financial emigration from South Africa.

What is financial emigration?

Financial emigration is an exchange control matter that allows a South African, with the approval of the South African Reserve Bank (“SARB”), to be classified as a non-resident of the country. South African residents who have been living abroad but who have not officially emigrated through the SARB are considered to still be South African residents for exchange control purposes.

Process and benefits of financial emigration

Any South African resident who wishes to financially emigrate from South Africa must:

  • Complete an MP336 form;
  • Apply for an emigration tax clearance certificate through SARS;
  • Should you have no assets in South Africa and you have been out of the country for longer than five years, you can financially emigrate with an exemption of needing to obtain a tax clearance from SARS;
  • Submit the application to the SARB for processing;
  • On approval, the proceeds of the sale of any remaining assets in South Africa – for instance the sale of a property or surrendering of a retirement annuity – will be deposited in an unblocked Rand account from where it can be transferred overseas;
  • Financial emigration would trigger a once-off capital gains tax liability on certain assets that you own both in South Africa and abroad;
  • It is possible to “backdate” the financial emigration to avoid having to pay capital gains tax on foreign assets that you obtained after you left South Africa;
  • You can access your South African retirement annuity funds before the age of 55; and
  • You can transfer future South African inheritance funds out of the country without being subjected to the South African resident exchange control process.

Way forward from here

Should you wish to discuss the option of financial emigration in further detail, please do not hesitate to contact me on either
(011) 516 9803 and / or (073) 229 8974, or by email at graeme@jnsfinancialservices.co.za.

Graeme Rigby
06 June 2019