So, the decision has been made, you are on your way to Florida. Lured by the long term prospect of attaining wealth and perhaps living in a safe environment with your family, you are on your way.What aspects must you consider? Obtaining a visa, checking the availability of schools, buying property or buying a car may well be top of your list.
In reality what should be top of your list is managing an effective tax strategy for yourself. What will you do with your assets in South Africa? What will happen to any income you earn in South Africa once you have left? These are all pertinent questions.
There is no simple answer, but what is vital is that you structure your affairs before leaving in a manner that will allow you to have the most tax benefits.One needs to have an understanding of what domicile and residency are.These are concepts that overlap to a certain extent, but they are still somewhat independent of each other. Different tests are used to establish one another.These shall be discussed further on in the article. For now, be aware that once in Florida your residency and domicile status will have differing effects on your taxes payable in America.
To establish residency, the "green card” and/or "substantial presence” test are used. In order to establish domicile, a subjective, intent-based, multi-factor test is used. You may be asking what is the relevance of all of this? Well, "residency” affects only income tax in America while "domicile” affects only federal transfer taxation and not income tax.It must be said here the norm is that if a person is domiciled in the USA he will most likely be a resident there and therefore subject to both forms of taxation.
Of importance, however, for tax-planning purposes, is the fact that even if a person is a resident in the USA this does not necessarily mean that that person is domiciled in the USA.Establishing residence is relatively straight forward and in the majority of instances a person will be subject to income tax in America as the tests for residence will in most instances be satisfied.
Where developing a tax strategy becomes critical is with regard to planning your domicile.I say "planning” because essentially a person can fine- tune his status in certain ways that will mean his domicile is different to his residency status. In short, you may be resident in America but domiciled in South Africa and therefore pay income tax only in America and not be subject to transfer federal taxation. So how can all of this be done then?
The test to establish domicile is a subjective, intent-based, multi-factor test. The general rule of thumb is that an individual is domiciled in the USA if he intends to remain in the USA for the indefinite future with no present intention to return to his former country. However, when ascertaining domicile the IRS will look at various facts, such as:
• Where the person’s primary residence is, for example, a permanent residence available in South Africa;
• Where the person’s primary business activity is located. For instance, CEO of a local company;
• Where the person votes. For instance this may be in South Africa;
• Where the person has a driving licence, For example, one may have a driving licence in South Africa as well as an international licence;
• Where the person’s treasured personal possessions are stored. For example, paintings and other valuables;
• Where the person’s family members live;
• Where the person observes religious ceremonies;
• Where the person’s major social cultural contacts are located.
This is not a closed list by any means, but as can be seen with careful pre-immigration planning, many of these factors may remain in the person’s former country of residence.Therefore, the situation of being resident in America and domiciled in South Africa is in reality quite feasible.Before embarking, get the advice of a professional and move right.
Source: By Daniel Erasmus and Allen Ross (TaxTALK)