There is a common misunderstanding that once a person permanently leaves South Africa (SA) (cease residency), their tax obligations in SA automatically cease immediately.
This mistaken belief is the reason why SARS has been intensifying its scrutiny of SA registered taxpayers living abroad. It is important to understand the actual criteria and timing involved in ending tax residency to ensure compliance.
Since 1 March 2001 SA moved to a resident-based tax system and the result was the following:
- Taxpayers with a resident tax status are taxed on their worldwide income.
- Taxpayers with a non-resident tax status are only taxed on South African sourced income.
With this legislation change it is crucial that a taxpayer ensures that his or her tax status is correct on SARS’s system. This responsibility rest solely on the taxpayer.
A taxpayer must inform SARS within 21 business days of any changes in their particulars which includes change in tax status.
Financial emigration – The ship that sailed.
Prior to March 2021 many SA tax residents that emigrated applied for financial emigration believing that at the end of the extensive and time-consuming process they will be reclassified by SARS as non-residents for tax purposes. With an Emigration tax clearance certificate from SARS and a stamp of approval from the SA Reserve bank, they could make early withdrawals from retirement annuities and pension interests still held in SA.
You may be surprised to learn that these individuals are still classified as SA tax residents on SARS eFiling.
Tax Emigration
March 2021 SARS implemented updated regulations and none of the financial emigration or any other steps applied regarding ceasing to be a tax resident in SA. The tax emigration is the only process to follow.
Furthermore, the “3-year lock-up” rule governing the early withdrawal of retirement annuities and pension interest still held in SA, was implemented.
- Change your tax residency status to a non-resident tax status.
You must declare your cessation date and provide all the relevant documentation to SARS.
If found in order, SARS will issue the only official document confirming non-resident tax status named the Non-Resident Tax Status Confirmation letter.It is important for a taxpayer to follow the correct procedures to avoid any unnecessary consequences and delays. Failure to comply with the Tax Emigration process may lead to non-compliance issues and potential penalties.
Also bear in mind that proof of citizenship in a foreign country on its own, is not sufficient to prove a person is no longer a tax resident in SA.
- The “3-year lock-up” rule
The "3-year lock-up" rule in SA, was implemented in March 2021, and requires a mandatory 3-year waiting period with a non-resident tax status before they can access and withdraw from their Retirement Annuity (RA) or pension funds.
Good news:
When applying to cease tax residency, SARS allows a person to backdate cessation to the time the person’s intent to remain abroad became clear, if the relevant / valid documentation is provided. - Have you heard of the term “exit tax”?
Section 9H of the Income tax Act No. 58 of 1962 (the IT Act) gives rise to a deemed disposal of worldwide assets on the day before a SA tax resident formally ceases tax residency (tax emigration).
It is important to note that this is not an actual sale but a deemed sale according to section 9H of the IT Act and results in a CGT liability. This liability is often referred to as “exit tax”.
The market value (on the day before the change in tax residency status occur) will be used in determining the “exit tax”.Assets included in the deemed disposal calculation:
- Foreign fixed property.
- Worldwide unit trust.
- Worldwide investment plan.
- Worldwide listed shares and unlisted shares.
- Foreign timeshare.
- Worldwide Krugerrands and gold coins.
- Cryptocurrencies.
Assets excluded from the deemed disposal calculation:
- South African fixed property.
- Cash balances.
- South African timeshare.
- Some Employee scheme shares that not yet vested.
- Some Employee scheme options that have been granted within 5 years of the cease date.
What is important to be aware of regarding the Tax Emigration process = Ceasing SA residency?
After SARS is informed that a person is no longer a tax resident and they have completed the tax emigration process—by paying any applicable deemed capital gains tax (if applicable)—that individual is then only considered a non-resident for tax purposes.
Key Points:
- Exit Tax:
When someone stops being a tax resident, they must notify SARS within 21 days. They need to declare a deemed disposal of all their worldwide assets, as required by Section 9H of the IT Act. - This disposal is calculated at market value the day before residency ceases.
- Tax Return Requirements:
Non-residents only need to file a tax return if they still earn income or hold assets that generate income in SA. - Protect Offshore Assets:
If someone first ends their tax residency with SA and later acquires offshore assets, they are not required to pay an exit tax on those assets. - Simplified Tax Process:
Non-residents only need to declare income sourced in SA, making tax compliance easier.
We strongly encourage any individual who emigrated or is planning to emigrate to get in touch with us if they have not yet sought professional advice regarding their current tax status at SARS and the tax emigration process.
If you would like to arrange a consultation or have any questions, please contact Adri Britz for further assistance at abritz@fhbc.co.za.
Source Reference:
1. SARS website: www.sars.gov.za
2. SAICA Student Handbook