The tax implications of emigrating
09 January 2015
Posted by: Author: Patrick Cairns
Author: Patrick Cairns (Moneyweb)
In this article Tracy Muller from Nedbank Private Wealth answers a question from a reader who wants to know what the consequences are of no longer being a tax resident in South Africa.
Q: I am moving to the UK next year with my company and will become tax resident there rather than in South Africa.
In order to formally emigrate, I understand that SARS will require me to pay capital gains tax (CGT) on my worldwide investments. I have two questions related to this:
Firstly, how would SARS treat the CGT on my primary residence if I decided to keep it? Would the exemption of ZAR 2 million apply or would they levy the tax without the exemption?
Secondly, will capital gains on my offshore investments, denominated in US dollars, be calculated on (a) the pure capital gain in dollar terms only multiplied by the current exchange rate or (b) the pure capital gain plus any exchange rate depreciation since the investment was made?
So, in a simplified example, if I had bought 100 Microsoft shares at $1 per share and an exchange rate of ZAR/USD 1:1 and the share price is now $2 and the exchange rate ZAR/USD 10:1 would SARS levy CGT on $100 or R1 900?
A: South African tax residents are subject to a residence basis system of taxation. In other words, they are taxed on all of their worldwide income and gains.
Non-residents, on the other hand, are taxed on a South African source system of taxation. That means that they are taxed on their actual or deemed income sourced in South Africa and capital gains arising on immovable property and assets of a permanent nature in South Africa.
A South African tax resident will cease to be a resident for tax purposes the day immediately before he or she becomes a resident in another country. You can read the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2012.
According to the Income Tax Act, when a person ceases to be a resident of South Africa in any year of assessment, that is deemed to be a disposal for tax purposes. Effectively, the person is treated as having disposed of his or her assets (subject to certain exclusions) for an amount equal to the market value of the assets on the day before he or she ceased to be a resident and then bought them again for the same market value the following day. Ceasing to be a tax resident in South Africa thus triggers capital gains tax on the person’s worldwide assets.
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This article first appeared on moneyweb.co.za.