Financial Emigration vs becoming a non-resident for tax purposes

This article intends to highlight the basic differences between financial emigration and the process of becoming a non-resident of South Africa for tax purposes.

There is often confusion between the two concepts, and individuals sometimes incorrectly assume that neither, only one or both may apply to them.

Becoming a non-resident for tax purpose

An individual’s tax residency refers to a status for tax purposes, and has an impact on disclosures to the South African Revenue Service (“SARS”) as well as the application of the Income Tax Act to that person.

There is no specific form to complete to request a change of tax status. However, SARS has recently included a question in the annual tax return that asks if you have ceased to be a resident during the year of assessment as well as the date of the change. It’s important to note that a person’s tax residency status will change based on a conscious decision to change your country of ordinary residence, but may also change based on the application of the rules of a Treaty for the Avoidance of Double Taxation between South Africa and another country.

The day before an individual becomes a non-resident for tax purposes, they are deemed to dispose of their worldwide asset base at market value on that day. This will trigger a capital gain or loss that must be declared to SARS, with the potential corresponding tax liability. There is an exclusion to this exposure, limited to fixed property situated in South Africa.

The practical difficulty related to the deemed disposal for capital gains tax purposes is the ability to access sufficient funds in order to settle the tax liability that was generated on the deemed disposal of the worldwide asset base. That may be an important factor that a taxpayer must consider prior to committing to a decision to break their South African tax residency.

After you become a non-resident for tax purposes, you are no longer required to submit a South African tax return, unless you still have assets left in South Africa that are generating a South African source income stream. In the instance of a non-resident, South Africa still has a taxing right to income sourced in South Africa.

It is important to understand that changing your tax residency does not mean that you automatically undergo a financial emigration, and in addition you may not even be required to apply for financial emigration.

Financial emigration

To emigrate financially is the process of making an application to the South African Reserve Bank (“SARB”) to place on record your departure from South Africa, specifically for the application of the Exchange Control Regulations. As part of the application process, any remaining assets of the person in South Africa are effectively placed under the control of the Authorised Dealer.

There is a specific process to follow in order to financially emigrate. This involves both an application to SARB that is submitted via your local banker as the Authorised Dealer, as well as obtaining a Tax Clearance Certificate from SARS specifically for the purposes of emigration.

When a person changes their tax residency, they may not be required to formally apply for financial emigration. However, in the event that the person wishes to, for example, receive an annuity from a retirement fund, they will not be able to access those funds unless they formally emigrate.

There is perhaps a more direct link between the concept of financial emigration and a change in tax residency on the basis that to formally emigrate with SARB, the individual would most likely also be a non-resident for tax purposes.

Conclusion

In conclusion, there are a number of complexities to be aware of in advance of taking any decisions to change tax residency or to financially emigrate. This article should not be construed to be an all-inclusive guide to emigration, but is rather to highlight the importance of consulting with professional advisors before any final decision is made.

*Article originally published in Business Brief

If you would like more information about this topic, please contact Neil Hughes or Engela Crocker directly.