When a South African tax resident ceases tax residency (e.g. emigrating on a permanent basis), there is
- a deemed disposal of his / her worldwide assets in terms of Section 9H of the Income Tax Act the day before cessation of South African tax residency for an amount equal to the market value of the asset(s) on that date, and
- a deemed acquisition of the same asset(s) by the taxpayer on the day that (s)he ceases South African tax residency.
It is not an actual disposal, but rather a deeming provision and “last bite at the cherry” for CGT in South Africa. One of the effects of “exit tax” is that the applicable asset(s) would have a stepped-up base cost (i.e. the market value of the asset the day before ceasing tax residency), and upon an actual disposal in future, it would mostly be excluded from South African CGT as a non-resident.
The cessation of tax residency may, for example, be the day before you get on the plane to leave South Africa permanently, e.g. the day that you change your intention to stay in another jurisdiction on a permanent basis and where your centre of vital interest also shifts from South Africa. Other factors are also considered.
The challenge is that the jurisdiction where the taxpayer would relocate to or have relocated to – if CGT is applicable in that jurisdiction – may probably not recognise the South African deeming CGT provisions and may the take the original base cost into account without considering the South African CGT paid before, resulting in a mismatch and double tax on the same capital gains.
Assets excluded from the “exit tax” include:
- South African residential property;
- Cash;
- Most retirement annuities / funds; and
- Assets not normally subject to CGT.
Investment portfolios – in South Africa and offshore – are included for exit tax purposes. “Exit tax” on investment portfolios held for a considerable time may be rather costly as
- the gains may be significant, and
- one would not necessarily have planned for the liquidity to settle the tax bill.
At the same time, it may feel like a grudge purchase as there is no actual disposal and return on investment as a result of the deeming CGT provision. Moreover, if not considered and assessed timely, the “exit tax” bill may be much more than what it could have been originally (if for instance interest is added onto the capital amount for purposes of a voluntary disclosure).
We therefore urge any taxpayer who is / was a South African tax resident and residing abroad to reach out to us if you have not obtained prudent advice as yet. There may be one of two processes to follow should we determine that you have / will cease tax residency, i.e.
- placing your tax residency on record and coordinating with the tax accountant on record to settle your “exit tax”, or
- submitting a voluntary disclosure application to SARS if you are in default and placing your non-residency status on record with SARS subsequently.
Should you wish to set up a consultation or have any questions, please contact Suzanne Smit for more information: suzanne@fidelisvox.co.za
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)