Leaving South Africa for good? What does this mean from a tax perspective?

The Lockdown period, for those who still have some income, has given time for reflection and the opportunity to make some firm decisions about the future. In a recent article it was reported that the number of enquiries from South Africans to a global emigration advisory company during this time showed a significant spike, as people looked seriously at their options elsewhere.

Whatever your reasons for choosing to embark upon the journey of deciding whether you stay in South Africa (SA) or leave, there are some important factors that you need to take into account and potentially investigate further.

The first is the tax implication of leaving SA for good. If you cease to be ‘ordinarily resident’ you will also cease to be tax resident on the day this takes place.  You are ‘ordinarily resident’ in the place you consider to be your ‘real home’ ie the place you return to after going on a trip. Thus, if that place becomes somewhere other than SA, you will cease to be tax resident in SA as well.

This sounds like a fairly simple exercise but, aside from making the decision to leave, you will need to be able to demonstrate that you have left and will not permanently return through your ongoing actions. This is because the onus of proving the date you ceased to be resident to the SA Revenue Service (SARS) will sit with you.

It is difficult to leave South Africa right now (and equally difficult to set up somewhere else) due to the travel restrictions. However, it seems that people are taking this time to lay the foundations for such a move ie ensuring they will have the right to live permanently elsewhere (residence or citizenship rights) and setting up the infrastructure (a home; a job; schools for their children etc) in their chosen location, so that it will be ready for them when they are able to depart. Once this is all set up it arguably could be possible to cease to be ordinarily (and thus tax) resident even though a person is restricted from leaving South Africa for the time being (but beware the 91 day ‘time present’ issue- I’ll cover this below).

Ceasing to be tax resident comes with it the obligation to submit a tax return for the period up to  the date before you leave (you can call up a special tax return on e-filing) or indicate the date you left on your next ordinary tax return. Either way, your tax year as a SA tax resident will end on the day before you leave and a new tax year, as a non-SA tax resident, will begin the next day.

The catch, however, is that you will be deemed to have sold all your assets on the day before you cease to be tax resident. This means that, on the tax return reflecting your date of ceasing to be tax resident, you will have to declare the market value of your worldwide assets on the previous day as well as their ‘base cost’ and, if there is a gain, pay capital gains tax (as an “exit tax”) on the difference between the two amounts. This applies for each of your assets, other than a few specified exceptions which include, for example, currency (although gold or platinum coins are not excluded) and fixed property in South Africa.

So, for example, if you have a share portfolio (local and/or offshore shares) which cost you, say, R2.5mn and it is worth R4mn on the day before you cease to be resident, you have a SA property (cost R1mn, market value R10mn) and also a property in the place you will be going to live (cost $500 000, market value $600 000), you will have to add 40% (the inclusion rate) of the gain in value of the shares and the offshore property to your other taxable income and pay tax on it.

Thus, for the shares the gain is R1.5mn and for the offshore property gain is R1.73mn ($100 000* R17.30 (assuming $1=R17.30)). If you have other income such that your marginal tax rate is 45% and you have already used up your CGT annual allowance due to other capital gains, the ‘exit tax’ payable will be R581 400 (40% of 1,5mn+R1,73mn) at 45% marginal tax rate).

Thus, before you finalise a decision to leave you need to understand what the cost of this “exit tax” will be and make sure you have sufficient money available to pay it.

If the values of your assets have dropped significantly with the current global economic situation the ‘exit tax’ could be much less than if you were to have ceased to be a SA tax resident either before the global lockdowns or if you leave it until later when things start to recover…perhaps a good reason to make the decision to leave now rather than later.

Going forward, as a non-tax resident, if you receive any income sourced in SA eg rental on the property, you will be taxed on that here, but you won’t be taxed on any of the income you earn (sourced) outside SA eg in your new country of residence. It is also important to be aware that, provided you don’t spend more than 183 days in SA during the 12 month period that interest is received or accrued on any personal bank accounts you still have here in SA, that interest will also not be taxable in SA after you cease to be resident.

So, what happens if you later sell the property in SA. Even non-tax residents must pay CGT on the capital gains made on SA fixed property disposals, so when you sell it CGT will have to be paid to the SA Revenue Service. By then, however, you will perhaps have no, or little, other taxable income here and, since you will pay the tax based on the sliding scale, it could be less than if you sell in the tax year before you leave. If the SA property was your home, in some circumstances you may also qualify for some or all of the R2mn primary residence exemption.

There are two other things that are important to note here:

Firstly, it will be very important that in the tax year after you cease to be ordinarily resident ie when you become non-resident, you don’t spend more that 91 days in SA. If you do, because the ‘time present’ test for residence relies on a person being in SA for more than 91 days in the current tax year (ie the tax year after you ceased to be resident) and each of the previous five tax years, as well as more than a total of 915 days in those same previous five years (which is likely for the time that you were resident) you will trigger this test. Unless a double tax treaty treats you as resident elsewhere you could be drawn back into the SA tax residence (worldwide tax) net and have to pay more CGT “exit tax” if you ‘cease’ again (which will require that you remain outside SA for 330 consecutive days).

Thus, the timing of your departure and time away after you leave is very important.

Secondly, ceasing to be tax resident is a completely separate test to exchange control (financial) emigration and relinquishing citizenship.  Thus, you need not financially emigrate or give up your SA citizenship to cease to be tax resident. Obviously, going through either or both of these processes will strengthen your assertion that you have left SA for good, but they are not pre-requisites.

There are many considerations that need to be borne in mind if you are in the process of making a decision to leave SA for good or not – both practical and tax (eg what do the tax and legal (eg for the purposes of making a Will) regimes in your potential new home country look like? ). It is not a decision to make without being fully aware of these factors and you would be wise to make sure you fully understand all of these to make sure you don’t make any mistakes that could cost you more than you bargained for. The fact that the SA government will pluck some of your money away as you leave as an ‘exit tax’ is only the first of many.