The biggest change to affect South Africans who transfer funds out of the country has been the removal of the financial emigration process. Since then, there have been some additional changes that affect those who want to encash their South African retirement annuities or receive a South African inheritance while living overseas. Here’s what the South African National Treasury has implemented.
1. Financial emigration out, tax emigration in
In March 2021, the financial emigration process ended, bringing in a new tax emigration process. This new process requires South Africans leaving the country to change their tax residency status from tax resident to non-tax resident with the South African Revenue Service (SARS).
2. Withdrawing your retirement annuity requires tax residency proof
Previously, to encash your RA you would have needed to undergo a process called financial emigration that involved changing your residency status with the South African Reserve Bank (SARB). As of March 2021, South Africans now need to:
- Tax emigrate by informing SARS that you are no longer a South African tax resident.
- Be able to prove to your fund provider that you have been a tax resident in another country for three consecutive years or more before you can withdraw your RA and transfer the funds out of South Africa.
If you left South Africa within the past three years
You can only apply for the encashment processonce you have completed the three years. Make sure your tax affairs are in order with SARS for a smooth process when the time comes to withdrawing your RA.
You can apply for tax clearance, prove you have been a non-tax resident for three consecutive years and then encash your RA and transfer it overseas.
Each investment company will have different requirements for this proof, which are likely to evolve as they process more of these applications. Before they can begin the process, they will also need to obtain authorisation from SARS in the form of a tax directive, and SARS will only issue this if your tax status has been correctly updated to non-resident.
3. It’s important to notify SARS
Many South Africans incorrectly assume that they can avoid paying tax if they don’t inform SARS that they have left the country. In the past, SARS would claim any tax (plus penalties) retroactively when they discovered non-residents. However, under the new process, South Africans will need to change their tax status to transfer their retirement annuities (RA) overseas. Those not wanting to encash their retirement savings will still need to comply with the process. The Common Reporting Standard agreement between international tax authorities allows for the sharing of information about financial accounts and investments, which means that you cannot avoid updating your tax status.
Since South Africa has a tax residence-based tax system, if you’re considered a tax resident in the country, you are taxed on your worldwide income and still have to file taxes if you live abroad. The first R1.25 million of foreign income is exempt from tax in South Africa, but thereafter it’s possible that you could be liable to pay tax twice on the same income if your new home doesn’t have a Double Taxation Agreements (DTA) with South Africa.
If you are considered non-resident in South Africa for tax purposes, then you only have to declare and pay South African tax on South African-sourced income.
Capital Gains Tax is automatically triggered
When you change your status to non-tax resident, you immediately become liable for Capital Gains Tax (CGT), which is calculated based on the value of your worldwide assets (excluding fixed property in South Africa). This “exit tax” is the tax SARS would have received had you sold your assets while you were a South African tax resident.
4. Changes to the single discretionary allowance
South Africans are entitled to two allowances for transferring money offshore. The first is a R1 million Single Discretionary Allowance (SDA), which does not require tax clearance. The second is a R10 million Foreign Investment Allowance (FIA), which requires a tax compliance status application with SARS.
The SARB has now made a minor change that will affect South African expats. While you will still be entitled to your FIA, South Africans will only be able to make use of the SDA up to and including the year in which they tax emigrate.
This means that any transfers out of South Africa after tax emigration will require tax clearance.
5. Claiming a South African inheritance if you live overseas
How you transfer your inheritance out of South Africa has also changed. The process is dependent on the amount inherited, your residency status and whether you have a South African identity document.
If you have an SA ID, you can use your SDA (if you have not tax emigrated) or FIA to transfer the money out of the South Africa.
Prior to 1 March 2021, if you did not have an SA ID (for example, if you left South Africa as a child), you could have completed the financial emigration process. SARB has recently passed a ruling stating that, if you can prove you are non-tax resident and are no longer active on the SARS registered system, you may receive an inheritance (or life insurance policy payout) of up to R10 million. If the amount is greater than R10 million, a manual letter of compliance is required.
Due to the lack of clarity surrounding the new process and the requirements to prove your status you may wish to work with a foreign exchange provider well-versed in South African exchange control regulation and tax compliance, who can assist you with providing the needed proof and transferring your funds overseas.
Taking money out of South Africa can be complex and stressful. We can assist you with changing your tax status, applying for tax compliance status and transferring your funds offshore, making sure you get the most out of your Rands. Send us a mail at firstname.lastname@example.org or give us a call on +27 (0) 21 657 2153 to get started.
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