What are the tax consequences?
Many South African tax residents relocate to different jurisdictions for different reasons. Much has been written about “emigration”, “exit tax”, “residency” and the most confusing of all is the difference between the tax and exchange control consequences. This article aims to clear the murky waters and set out the simple principles when you are leaving South Africa.
Generally South African tax residents are taxed on their worldwide income and for capital gains tax purposes, the disposal of their assets worldwide, i.e. regardless of the jurisdiction. South African tax residents do not just include South African citizens, but it could be any person who triggers tax residency in South Africa.
In terms of our domestic tax laws tax residency is firstly determined by the “ordinarily residence” test. This ultimately boils down to your intention when relocating from South Africa and subjective circumstances being applied to objective factors. This may include your family and social ties, economic centre and activities, and ultimately where you return to after all your wanderings across the world. Should you not be considered to be ordinarily resident based on the “ordinarily residence” test, then the physical presence test is applied. This test is purely objective and the following three requirements must be met to be deemed a South African tax resident:
You will have been physically present in South Africa for a period, or periods, exceeding:
- 91 days in aggregate during the tax year under consideration;
- 91 days in aggregate during each year of the five tax years preceding the tax year under consideration; and
- 915 days in aggregate during the above five preceding tax years.
The last requirement amounts to an average of 183 days per year. If any of the requirements are not met, you will be considered to be a non-resident for tax purposes.
This then leads to “exit tax”. In terms of section 9H of the Income Tax Act, a person is deemed to have disposed of all of their assets on the day prior to ceasing tax residency with the effect that the South African tax resident may be liable for capital gains tax (CGT). In practice a deemed disposal is triggered of the taxpayer’s worldwide assets (excluding certain assets) at market value on the day before the date of ceasing tax residency with a a deemed reacquisition of such assets at their market value on that same day resulting in a stepped up base costs of the said assets. The market value of the deemed disposal will therefore be the new base cost in order to avoid double taxation for actual disposals in future (where CGT will apply to the non-resident).
The challenge relating to the potential exit tax is sufficient liquidity to settle the CGT liability with SARS. It would be prudent to consider your worldwide assets and liabilities to determine the potential capital gains tax cost of ceasing tax residency and based on the outcome, ensuring that sufficient liquidity is available to settle the liability.
It is important to note that the onus is on the taxpayer to declare ceasing tax residency in the specific year of assessment which will then open the Section 9H deemed CGT / exit tax part of the tax return to declare the deemed disposal in the return.
Should you not be compliant from a tax perspective, you will be liable for administrative non-compliance penalties and potential understatement penalties of up to 200% depending on the complexity of the matter, circumstances relating to non-disclosure and the amount of the deemed CGT liability being understated.
Should this article be of interest to your personal considerations and you require formal advice, please contact Suzanne Smit at suzanne@fidelisvox.co.za. Our next article will deal with consequences in relation retirement funds when relocating abroad as well as exchange control considerations.
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)