When planning a big move overseas, it’s easy to forget one of the most important things: tax. Here’s a non-exhaustive list of things you should consider before you leave South Africa that can reduce your tax bill.
*This blog was first published in June 2021 and has been updated with new information for accuracy.
Tax residency and double taxation agreements
The first thing you need to be aware of if you’re planning to relocate is where you will be liable for tax and how much tax you’ll be expected to pay in South Africa and in your new home.
South Africa has a residency-based tax system, which means that you’re taxed on worldwide income if you’re considered to be a South African tax resident.
It’s possible to leave South Africa and still be considered tax resident. For example:
- If you leave South Africa but your spouse and children still live in SA
- If you spend more than 91 days in South Africa per year
- If you have a number of assets still in South Africa
- If you leave South Africa to work on a private charter yacht
- If you keep your belongings in storage in South Africa
Unfortunately, tax residency tests are largely subjective and the above are only a handful of examples, so it’s important to get advice from a tax practitioner to determine your tax residency status before you leave.
If you are tax resident in South Africa, you will always need to submit tax returns in South Africa. However, you may not need to pay South African tax. If you have spent more than 183 days outside of the country in the relevant 12-month period (at least 60 of those days being consecutive), then the first R1.25 million earned in foreign income is exempt from SA tax.
You may also be protected from paying SA tax by becoming tax resident in another country that has a Double Taxation Agreement (DTA) with South Africa. For instance, once you are tax resident in the UK, the UK’s tax treaty with South Africa means you only need to pay tax on your UK income in the UK. Not all countries have DTAs with South Africa and the terms of the treaties can vary.
For this reason, we always advise clients to seek tax advice in both South Africa and the country they’re moving to, or to speak to a cross-border tax specialist who is familiar with both jurisdictions.
SARS non-resident tax status confirmation letter
As of 2022, SARS issues non-residency tax status confirmation letters to persons who are permanently leaving the country. This letter confirms that SARS agrees that you are longer a tax resident of South Africa and provides an account of the date tax residency ended.
To apply for the Non-Resident Tax Status Confirmation Letter, you must have already completed the tax emigration process through SARS.
If SARS does not issue a letter upon request, it means that you have not changed your tax residency on their core system or that the change has been removed or denied. In this case you will need to submit a new application. This may result in additional costs.
Since SARS does not currently issue tax non-residency certificates automatically, it is important that you are proactive and take the necessary action.
Having a tax non-residency status, amongst other factors, means that:
- Only South African income will be taxed
- There is no tax on international income earned
- Capital Gains Tax will only apply to fixed property located in South Africa and assets of permanent establishments
Plan your move around capital gains tax
When you emigrate from South Africa and leave the South African tax net, SARS sees you as selling your worldwide assets to your foreign self, and you become immediately liable for capital gains tax (CGT) on them. Essentially, SARS is claiming the tax that it would have received on those assets had you sold them while being a South African tax resident. This means that if you are emigrating from SA the timing will affect your tax payments. Immovable property in SA is excluded because SARS will still claim its share of tax when you eventually sell (more on that below).
Insider tip: The CGT that comes due when you leave is sometimes referred to as “exit tax” and you can significantly reduce it by leaving South Africa early in the tax year.
Capital gains tax in South Africa isn’t a flat rate. Rather, a portion of capital gain gets added to your taxable income for the year. This means that the larger the taxable income, the more likely it is that the CGT will shift you into a different tax bracket. By leaving early in the tax year, you will have a lower total taxable income for the year and will likely be able to remain in a lower tax bracket and pay less overall tax when you leave.
What many South Africans don’t realise is that the exit tax is due immediately when you leave, not at the end of the tax year when you file the return declaring your change of tax status. If you wait until your next tax return to pay, SARS is then entitled to charge penalties for late payment of those taxes.
Don’t let the exit tax come as a shock. Ask a South African tax practitioner to help you work out when and how much to pay so you can plan ahead and incorporate it into the cost of immigrating.
Capital gains tax on property
As mentioned above, you don’t have to pay exit tax on South African property, but you will have to pay CGT on it when you eventually sell it down the line.
However, your primary residence is exempt from CGT for up to R2 million. One way you can save on tax is by selling it before you leave SA, while it’s still your primary residence. If the property is worth more than R2 million and you sell in the same tax year as your exit, you will need to be careful that your combined CGT (from the property sale and the exit tax) doesn’t push you into a different tax bracket. If the property hasn’t been your primary residence from the time you bought it to the time you sell it, you may also be liable for more CGT and it’s best to get tax advice to calculate what this total would be.
Insider tip: there is a special allowance for South Africans who can show they were attempting to sell their primary residence when they left the country.
If you put your primary residence on the market before you leave, it can be considered your primary residence for a further two years so long as it remains on the market. This would enable you to make use of the R2 million threshold and shift any CGT over that threshold to another tax year.
To make use of this allowance, it is essential that you do not rent out the property before you leave as it will then stop being your primary residence. However, once you have left you can rent it out as long as it is still on the market for sale.
Don’t put off tax emigrating
Many South Africans leave the country without informing SARS. Unfortunately this can have a knock-on effect and lead to penalties or complications down the line. These are just a few of the problems delaying tax emigration can cause:
- SARS could spring a “jeopardy assessment” on you at any time, where you will be forced to prove that you are no longer a South African tax resident and do not owe SARS tax on your worldwide income.
- If you tax emigrate later (or are forced to prove yourself non-tax resident), you will become immediately liable for exit tax and SARS potentially has the right to work this out based on your current asset base (this however is untested) rather than the one at the time when you left, which might be greater. You may also have to pay penalties.
- You may struggle to transfer your retirement annuity out of South Africa. As of 1 March 2021, you have to prove you’ve been non-tax resident in South Africa for three years before you can get your RA out of the country. You will also need to have informed SARS of the change in tax status before you do the application to get your RA paid out.
- SARS will have a large backlog, so we can foresee many delays for those who wait. The earlier you start the process, the earlier it can be over and done with.
Insider tip: When transferring large amounts out of South Africa, it’s best to consult with a forex specialist as rules and restrictions might apply.
Finally, it’s important to get tax advice well in advance of leaving South Africa, as sometimes it’s possible to restructure your assets and investments before you emigrate to ensure maximum tax savings.
You may wish to speak to a cross-border wealth advisor, with knowledge of the ideal tax wrappers and allowances for your particular situation.
Our South African tax team works hand-in-hand with our wealth advisors and forex department to ensure you head into your new life with the best possible start. Don’t pay more tax than you need to when you emigrate. Speak to our team at email@example.com or by calling +27 (0) 21 657 1517.
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