Capital Gains Tax. If those three dreaded words send chills down your spine, this post is for you. What is capital gains tax exactly? How will capital gains tax affect you as a South African expat? Does it still affect you even after emigration? If you’ve got questions about capital gains tax, then read on – because we’re here to answer them for you!
Let’s take a step back. What is financial emigration
Financial emigration is the formal process of applying to the South African Reserve Bank (SARB) to have your status changed from “resident” to “non-resident” for exchange control purposes. Financial emigration does not do away with your tax liability, nor does it change your South African citizenship in any way.
Financial emigration isn’t compulsory or automatic. This means that just because you’ve left South Africa doesn’t mean that you’ve emigrated financially. Nor are you obligated to apply for financial emigration if you’re living overseas either, as South Africans abroad can utilise their annual discretionary and foreign investment allowances to shift funds from South Africa as necessary. As such financial emigration is a voluntary undertaking, but it does come with a number of benefits that might work out in your favour, when it comes to accessing and shifting certain financial assets out of the Republic, such as retirement annuities, future inheritances or passive income.
What are the disadvantages of financial emigration?
Financial emigration crops up frequently as a suggestion for South Africans looking to avoid paying expat tax. This is short-sighted. The process of financial emigration can be expensive and complicated, if you’re not doing it for the right reasons. Once your financial emigration has been recorded with the South African Reserve Bank, you are deemed to have disposed of all your South African assets – and this deemed disposal triggers a capital gains tax on your financial exit.
What’s the deal with Capital Gains Tax? Do I have to pay it if I’m non-resident?
South Africans are often horrified to discover financial emigration isn’t going to stop the South African Revenue Service (SARS) from taking an interest in them one last time. Once financial emigration is finalised, be prepared to pay SARS their “exit charges” in the form of Capital Gains Tax. Intended to deter high net worth individuals from shifting their wealth abroad, SARS will make the most of their final opportunity to hit you with a tax bill when your status changes to “non-resident”. Currently 40% of the gain is included as income and taxed at your marginal tax rate. Ouch! Fortunately, immovable property (which includes your residence and/or commercial property) does not fall into this capital gains tax liability calculation, because SARS knows that they’ll be able to tap that for tax one more time upon sale of the property, through the withholdings tax you will be required to pay as a non-resident.
This means that if you are considering financial emigration (and you’re not doing it because someone incorrectly advised you it’s a means to escape expat tax) and the only thing stopping you is the prospect of having to pay over that Capital Gains Tax, it’s important to bear in mind that you’re going to have to pay it at some point. You can either pay it now on financial emigration, or it can be paid from your deceased estate on your passing. That’s right. Death works the same as financial emigration, you’re deemed to have sold all of your assets and investments when you shuffle off this mortal coil. Pay now, or pay later – you decide.
What is tax emigration from South Africa?
While financial emigration is concerned with notifying the South African Reserve Bank that your status is changing to non-resident for exchange control purposes, tax emigration is the process of notifying the Revenue Service that you intend to cease your South African tax residency and become a non-resident who is subject to a different set of tax rules. Much the same as financial emigration, tax emigration also triggers an “exit tax”, which is basically a form of capital gains tax that is calculated from the day on which you stopped being a South African resident for tax purposes.
How do you know if you are a South African tax resident?
Generally speaking, you become a non-resident for tax purposes in South Africa when you no longer meet the requirements that indicate your tax residency. In terms of the Income Tax Act, people who are residents of South Africa are taxed on their worldwide income back home, subject to a few exclusions while non-residents are taxed only on their income from a source within South Africa.
The Income Tax Act defines a resident for tax purposes, and you will be considered a South African tax resident if you meet the ordinary residence or the physical presence test, and you aren’t found to be tax resident or subject to the tax jurisdiction of another country in terms of a double tax agreement. If you no longer meet the requirements of these tests, you will be considered to have terminated your tax residency and a capital gains tax liability is then triggered and back-dated to the day before the calendar date on which you ceased being a tax resident. Please note that if your tax residence changes, you are obligated to tell SARS.
Read more about how to terminate your South African tax residence and what that means.
What Capital Gains Tax liability is triggered by tax emigration from South Africa
When South African resident taxpayers become non-resident for tax purposes they may become liable for capital gains tax. Once the change to non-resident has been officially approved, the Income Tax Act treats this as a disposal of all assets. This is deemed to have taken place the day before your change in status, which means that your assets will be treated as if they were disposed of at market value on that day and then bought again at current market value. There does not have to have been a sale, it is simply “assumed” to have happened for the purposes of calculating the capital gains liability. The exception to this rule is immovable property, as discussed above.
FinGlobal: South African tax experts for South African expats
Confused about the difference between financial emigration and tax emigration? Worried about the implications of capital gains tax because your tax residency status is unclear? Relax. It’s our area of specialty. We’re waiting to answer any of your questions related to expat tax, and we’re perfectly positioned to help you with tax clearance, tax refunds, and more.
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