If there’s a phrase that makes people uncomfortable, it’s definitely “Capital Gains Tax”. While it might sound scary, if you’re prepared for it you can break it down step by step and minimise the impact of capital gains tax on your life and your stress levels. With this in mind, let’s take a look at what capital gains tax is, and how it’s likely to affect you as a South African expat, especially if you’re considering tax emigration or you’re no longer a South African tax resident.
Capital Gains Tax on emigration South Africa
Simply explained: what is CGT in South Africa?
Capital gains tax is a levy that was introduced 20 years ago by the South African Revenue Service (SARS) on the disposal of an asset on or after 1 October 2001 (the valuation date). There are a few things worth noting about capital gains tax in South Africa:
- The Income Tax Act 1962 details the CGT provisions which determine a taxable capital gain or assessed capital loss.
- Any disposal of your assets and subsequent capital gains and losses will be subject to capital gains tax, unless there is a specific CGT exemption that applies.
- A taxable capital gain falls within your taxable income, which means that while it has a fancy name, capital gains tax is not A Whole Separate Big Deal, but a line item on your income tax return. This means that you don’t have to register specifically to pay capital gains tax.
- You will trigger a capital gains tax liability when you make a profit selling an asset that you own. However, the CGT tax is calculated on the profit you make and not the amount you sell for.
- Individuals, trusts and companies alike are expected to pay capital gains tax in South Africa; and as a South African tax resident you must pay CGT on both local and worldwide assets.
- Non-residents are only liable for capital gains tax on immovable property located within the Republic.
Capital Gains Tax: an exit charge on your tax emigration from South Africa
What does capital gains tax have to do with you, as a South African living abroad? It’s simple. Once you no longer meet the requirements of tax residency in South Africa, you become a non-resident for tax purposes. Also known as tax emigration, once your status changes from resident to non-resident for tax purposes, a capital gains liability is triggered. For this reason, capital gains tax on emigration is known as an “exit tax”.
When you emigrate from South Africa and exit the South African system, SARS takes one last cut of your pie with a deemed disposal of your worldwide assets. This means they treat you as if you have sold your worldwide assets to your foreign self, the day before you ceased to be a South African tax resident and you then become immediately liable for capital gains tax on these assets. As a result, if you are emigrating from SA the timing can affect your tax payments.
How is capital gains tax calculated?
Capital gains tax in South Africa isn’t a flat rate. So how does it work? A portion of capital gain gets added to your taxable income for that tax year, which means that the larger your taxable income, the higher your tax bracket. By timing your exit early in the tax year, it is possible to ensure that you have a lower total taxable income for that year, which means that you’re likely to stay in a lower tax bracket and reduce your overall tax obligation for that year accordingly.
It’s important to note that the exit tax is due immediately on your exit, and not at the end of the tax year when you file your tax return and declare your tax residency status change. If you wait until your next tax return to pay, SARS is within their rights to charge late payment penalties on your capital gains tax obligation.
If you’re still planning your tax emigration, or you’re still planning your physical relocation, it’s worthwhile getting objective advice from an expert tax practitioner. With the right assistance you’ll be able to work out exactly when and how much you’re going to be expected to pay, so you can plan ahead and include your CGT in your immigration budget.
What are the consequences of ceasing tax residency in South Africa?
As a South African taxpayer, it is your responsibility to ensure that SARS has your tax status correctly recorded. If your status has changed, you are expected to inform SARS in the same tax year during which the change occurred. If you do not notify SARS of your status change, they’re allowed to raise assessments and hit you up for tax on your worldwide income; and if there is tax due as a result of a status change, SARS can charge you administrative penalties for non-declaration and non-payment, which can be as much as 200% of the amount depending on the circumstances.
When should tax emigration be reported?
Tax emigration should be declared in your tax return that covers the period in which the status change occurred. While there is a delay in the difference between calendar and tax years, it’s important to bear in mind that the changes will apply retroactively (with backwards effect) when you do eventually file. If you report the change at a much later date than when it actually took place, it gives SARS the opportunity to demand you pay tax on the asset base you have at the time you make the change notification, and not when it actually happened. This means that if you’ve acquired any significant assets since, there’s a chance you’ll be taxed accordingly.
When would the capital gains tax be due?
The day before you become a non-resident for tax purposes, you will be deemed to dispose of your worldwide asset base at the market value on that date. A Capital Gains Tax event is triggered, which is your exit charge.
When you change your tax status, SARS will deem there to be an additional period of assessment due during the tax year, which will then necessitate a provisional tax return to be filed where your taxable income exceeds R1 million in that tax period. Here, your tax will be due on the day you leave South Africa, even if the tax year is still in progress. If you fail to pay on leaving, and you do this return at a later date, SARS can levy late penalties back to the date that you left.
Top tip: Reduce your exit tax significantly by leaving South Africa early in the tax year
- Up until the moment you change your tax status, you’ll be taxed on your worldwide income as usual (hello, expat tax!)
- On the day of the change, you’ll be due to pay your exit tax (CGT) and you may need to declare and pay tax on your South African sourced income.
- Once you are a non-resident, you will no longer need to submit a tax return in SA, unless you still have income-generating assets left behind.
FinGlobal: cross-border tax experts for South African expats
If tax isn’t your specialty, it’s not the smartest idea to wing it on your own. To avoid nasty penalty charges and unpleasant tax surprises, you’d be smart to bring on expert tax practitioners to ensure that you’re properly square with SARS and you know exactly what you’re getting yourself in for, when it comes to paying capital gains tax on your emigration from South Africa.
Let us handle it! FinGlobal will reduce your stress by completely eliminating the administrative headache of dealing with SARS for you. Leave us your details and we’ll be in touch!