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Moving is emotive, moving to another country even more so. Add tax consequences to the equation and you may just reconsider it.

This article guides those seeking to move offshore through the maze of exiting South Africa with a specific focus on tax considerations in order to be proactive instead of facing a myriad of questions after the fact.

Residency status

Residency status could be regarded as the entry into the maze before exiting South Africa. Several tax risks and considerations hinge on this aspect, including changing your tax residency status with SARS with the consequences related thereto, declaration of income to SARS going forward (including foreign employment income), as well as pension withdrawals and other considerations.

Tax residency is important to consider when moving abroad because South African tax residents (‘tax residents’, or ‘tax resident’ in singular form) are taxed on a worldwide basis. Non-tax residents are taxed at source or deemed source with tax treaty considerations to keep in mind to avoid double taxation. A tax resident with multiple income streams domestically and abroad, including capital gains, should declare his / her worldwide income in his / her South African tax return, claiming foreign tax credits where applicable. Non-tax residents are taxed on income sourced in South Africa or deemed to be sourced in South Africa with capital gains being applicable in limited circumstances.

All too often taxpayers would only consider the physical presence test as the predominant or only test and, based on what friends have said or a friend’s advisor, determine their tax status accordingly.

This is not the correct way to go about it, especially when it carries several related risk factors. Taxpayers should first consider the ‘ordinarily residence’ test. Factors such as intent, centre of vital interest, access to a permanent home exclusively available to the taxpayer and habitual abode, i.e. where you reside more often, should be considered.

Planning in advance is always a good idea and it is recommended to make sure you know when tax residency would be triggered in the new country, especially to mitigate double taxation where possible. If the taxpayer is a beneficiary of a trust (or a foundation in some instances) that is registered and resident either in South Africa or elsewhere but the new country, there may be adverse consequences on a deeming basis to consider in the new country.

When moving abroad, taxpayers should, therefore, first seek to determine whether or not they would be ceasing tax residency or not, as this will have an impact on the next step, with the first step being to place any changes of registered details on record with SARS via the RAV01 form within 21 days of the said change.

Should it be determined that a tax resident has not ceased tax residency in South Africa, it would be prudent to review this status on an annual basis, keeping these factors in mind. It is also important for taxpayers to understand tax residency rules in the new country to navigate the maze abroad and it is always prudent to consider professional advice.

Deemed sales rule or ‘exit tax’: section 9H of the Act

Capital gains tax is imposed in limited circumstances on non-tax residents, e.g., disposal of immovable property (e.g. holiday home or property portfolio) in South Africa.

Therefore, as a last bite at the cherry when a taxpayer ceases tax residency in South Africa, a capital gains tax event arises due to a legal fiction created in the Income Tax Act on a deeming basis. The effect is that the taxpayer must be treated as having disposed of his or her worldwide assets at market value on the date immediately before the day on which residency is ceased, with reacquisition at the same market value on the same date as a non-tax resident. This means that the taxpayer would, for South African tax purposes, have a stepped-up base cost (i.e. the new market value) and would only be liable for capital gains tax in South Africa in very limited circumstances going forward.

It is important to note, however, that the new country’s capital gains tax laws should be considered separately and that their tax laws won’t necessarily accept the stepped-up base cost and that the original base cost could still apply.

A specific tax risk to be weary of is liquidity to settle the capital gains tax liability in the applicable tax year in which tax residency is ceased, especially because no actual disposal of capital assets has taken place.

The deeming sales rules only apply to the taxpayer as natural person when ceasing tax residency and it does not apply to trusts connected to the taxpayer as they are separate taxpaying entities. It applies to worldwide assets of the taxpayer, excluding pension benefits, cash and immovable property.

To be continued

In Part 2, we will cover the foreign employment income exemption, pension withdrawals and other ancillary considerations when moving abroad.

Should you have any questions relating to the above, please contact Suzanne Smit (suzanne@fidelisvox.co.za).

  • (Original full article: TaxTalk, Issue 99, February / March 2023)

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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