Financial Emigration's Jonty Leon explains the implications of recent 'expat tax' amendments.
There appears to be a concerted effort on the part of the South African treasury to speak to South Africans working abroad. There has been an outflow of South Africans in recent years for various reasons, not least of which has been the punitive “expat tax” regime promulgated in December 2017, and effective 1 March 2020.
Financial emigration has been the main process to avoid this tax, as it gave non-residency status to individuals. There were many tax professionals who claimed that emigration through the South African Reserve Bank had no bearing on a person’s tax status, but the recent Budget 2020 announcement has now conclusively confirmed this view as incorrect. The fact that an emigrant gets a ‘Tax Clearance Certificate – Emigration”, means that the individual is a non-tax resident, provided the application was truthful and not used as a tool to evade taxes.
The budget announcement had some surprising announcements on SARB Emigration, making three main points, which I will unpack a little further in this article.
“We want to encourage South Africans abroad to keep their ties with the country”
What exactly is meant with encouraging South Africans abroad to keep their ties with the country, is not clarified? Having ‘ties’ with South Africa is a factor to be considered is whether you are tax resident in South Africa, thus having to declare worldwide income and pay taxes in South Africa. Thus, if having ties means risking to pay tax in South Africa on worldwide income, capital gains, estate duty, and so forth. I believe some of the more finance-savvy expatriates may choose to kindly decline this gesture of friendship.
“We will raise the exempt amount for foreign remuneration to R1.25million”
This announcement was a surprise to many, but not perhaps taken the weakness in the Rand. In Dollar terms, when the law was announced 18 December 2017 the Rand-Dollar exchange rate was R13,10, thus effectively $76,336 per annum was exempt. On the announcement of the new R1.25m at a conversion rate of R15,26, gives you $81,913 exempt, thus an effective 7 percent relief over two to three years, depending on the measure applied.
The more the ZAR weakens, the more the exemption is eroded. One can only hope the Rand will strengthen in the next 12 months, but this is unlikely.
“We will phase out the administratively burdensome process of emigration through the South African Reserve Bank”
This is a welcome change as the process is indeed administratively burdensome. However, this change is not immediate and remains the law until the new regime is implemented on 1 March 2021. What this new process will look like are very uncertain, albeit scant details are shared in the Budget Announcement:
“Following reforms to the income tax treatment of South African tax residents who receive remuneration outside the country, the government proposes to remove the exchange control treatment for individuals, while strengthening the tax treatment” contrary to some commentary shot from the hip; whilst it is true that the SARB process will be repealed, there will be ‘strengthening [of] the tax treatment’; we expect a revenue-hungry and collection-driven SARS to become much more strict on South Africans abroad. The announcement notes that there will be a – “more stringent verification process, also a risk management test that will include certification of tax status and the source of funds”.
What exactly all of this means is unclear, but a more stringent verification process, risk management test and ‘certification of tax status’; will probably not be a walk in the park which some commentators suggest. Anyone who has dealt with SARS VAT refunds will know that once you are on the radar from a risk management perspective, you must be prepared for multiple requests and a thorough examination.
This announcement around abolishing SARB emigration, in many ways, echoes the massive South African policy shifts to abolish private medical aid and implement expropriation without compensation. The announcement is made, but there is no concrete solution tabled which gives South Africans, who have the means to seek greener pastures, some degree of comfort. As it stands, the government is now on record that the projected revenue collection will be R63.3 billion short.
The taxes on South Africans working abroad is clearly high on the agenda and perhaps one would be forgiven to be sceptic towards those who advocate that this level of government attention is helping expatriates to escape the tax net. As the saying goes, better the devil you know; this means South African emigrants are now on notice that they have one year for ‘financial emigration’; where after an uncertain new “more stringent verification” process, awaits.