The Legal and Tax Consequences of Emigration
19 September 2016
Posted by: Author: Hanneke Ferrand
Author: Hanneke Ferrand (ENSafrica)
Synopsis of a presentation given at the sixth Annual Conference of the Fiduciary Institute of Southern Africa (FISA)
Any person who is considering leaving South Africa permanently should carefully take into account the tax implications of ceasing to be a tax resident here as well as the further consequences of such a departure should he/she formally emigrate for exchange control purposes. Emigration for tax purposes could have immediate tax consequences with a possible liability for tax. This liability is often missed, which could result in incorrect disclosures being made or the late payment of tax. This, in turn, could attract penalties and interest.
Tax considerations that should be considered Capital Gains Tax "exit charge”
Ceasing to be a tax resident of South Africa may have significant capital gains tax consequences as it generally results in the deemed disposal at market value of your worldwide assets. The main assets which are excluded from the deemed disposal are immovable property situated in South Africa and any equity instruments acquired by virtue of employment which have not yet vested for tax purposes.
The individual’s tax year is also deemed to have ended on the date immediately before the day on which the person ceased to be resident. Any capital gains and/or losses arising from the deemed disposal would be included in the person’s annual income tax return for that tax year.
Tax residency tests
A natural person is regarded as a South African tax resident if he/she is ordinarily resident in South Africa or, if he/she is not ordinarily resident but has spent more than a certain number of days in South Africa over a period of six consecutive tax years i.e. the so-called physical presence test.
Whether an individual has ceased to be ordinarily resident involves a factual enquiry based on all of the relevant facts and circumstances of that person. Two requirements should be met to demonstrate that an individual has left South Africa, namely, an intention to become ordinarily resident in another country and steps indicating that this intention has been or is being carried out. The fact that a person may remain a South African Exchange Control resident or may undertake regular visits to South Africa are not, by themselves, determining factors that the person has not ceased to be ordinarily resident here, but are relevant to the enquiry.
An individual who has met the above requirements should restrict the number of days he/she is physically present in South Africa in the tax year following his/her emigration to no more than 91 days. This ensures that the physical presence test is not again met in that subsequent year.
Importantly, if an individual is deemed to be exclusively a resident of another country for purposes of the application of any double taxation agreement entered into between South Africa and the country of which the individual is a resident, then that person will not be regarded as a tax resident of South Africa under either the ordinary residence test or the physical presence test.
Taxation of non-residents
As a non-resident, an individual would only be subject to tax on his/her South African sourced income and capital gains.
South African sourced income would include South African interest, dividends paid by South African resident companies and rental income from fixed property. However, interest paid to a non-resident individual could be exempt from tax.
Non-residents are subject to capital gains tax on the growth in the value of immovable property in South Africa.
Exchange Control implications of emigration
An individual may continue to be regarded as a resident for Exchange Control purposes even if he/she ceases to be tax resident here. Emigration for Exchange Control purposes requires a formal emigration application to be made to the Financial Surveillance Department of the South African Reserve Bank. All emigration applications require a tax clearance certificate from the South African Revenue Service.
After emigration, the individual’s remaining South African assets and any other assets accruing to him/her after emigration must be placed under the control of an Authorised Dealer. Any cash balances, subsequent capital payments and the proceeds of any assets sold must be credited to the emigrant’s blocked capital account with the Authorised Dealer and may be utilised locally for any purpose, subject to certain limitations.
Most types of income due to emigrants would be transferable abroad, subject to certain conditions and documentary requirements in some instances.
Specific rules apply to trust distributions. All applications for the transfer of income from a testamentary trust to an emigrant beneficiary must be approved by the South African Reserve Bank, unless the total net income of the trust is less than R500 000 per annum. Capital distributions from testamentary trusts due to emigrants may be remitted abroad, subject to documentary requirements, and the Authorised Dealer is required to ensure that the emigrant has been formally designated as non-resident, otherwise such capital distributions would have to be approved by South African Reserve Bank.
In the case of inter vivos trusts, all initial requests for the transfer of income to an emigrant beneficiary must be approved by South African Reserve Bank and will be subject to certain conditions. Should permission for the initial transfer of income to a specific beneficiary be granted, the Authorised Dealer may effect payment of such income, as well as future annual or interim income, to the Authorised Dealer controlling the emigrant’s remaining assets.
All requests for the transfer of income derived from donations or gifts or capital distributions from inter vivos trusts received by emigrants within three years prior to the date of emigration must be approved by South African Reserve Bank.
In conclusion, it is important for individuals considering emigration from South Africa to be aware of the consequences and obtain professional tax advice to ensure that their South African tax obligations are fulfilled. Disclosures in tax returns in the year of emigration and following years should also be carefully considered to ensure that the intention to relocate is properly recorded. These disclosures could be critical in future years should one’s tax residency or ability to exit funds be questioned.
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This article first appeared on the September/October 2016 edition on Tax Talk.