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Key factors to consider in financial emigration

29 May 2023 Citadel
Citadel Advisory Partner, Christelle Louw

Citadel Advisory Partner, Christelle Louw

Investment emigration by South Africans has been on the rise for the past 25 years, but has recently seen a significant increase due to many factors such as the weakening local currency, load shedding and high unemployment.

Citadel Advisory Partner, Christelle Louw, unpacks the trend and shares a few important points about tax, retirement funding, trusts and wealth transfer.

THE TREND

Recent data shows that many wealthy South Africans are considering some form of emigration. In the past decade alone, approximately 4,500 high-net-worth individuals have left South Africa with many families opting for host countries that offer attractive residency and citizenship programmes.

“A major factor driving this trend is the weakening rand, which currently clocks in at a depreciation of 13.6% over the past year-to-date. Accompanied by South Africa’s dismal unemployment rate at 32.9% (among the highest in the world), country risk and despondency are driving people to diversify their wealth and earn in currencies that do not devalue,” says Louw.

Popular emigration destinations for South Africans include Portugal and Gibraltar in southern Europe, the Caribbean, the United Kingdom and Commonwealth countries such as Australia, New Zealand and Canada, Switzerland, and nearby investment destinations such as Namibia and Mauritius that have recently gained popularity.

THE RULES

Louw advises that emigration changed in March 2021 when the process was transferred from the South African Reserve Bank (SARB) to the South African Revenue Services (SARS). The direct consequence of this is that when a person has ceased to be a tax resident, he/she is regarded to have emigrated.

Tax residency is primarily determined by the application of the Ordinary Residence test. A natural person will be regarded as having ceased to be an ordinary resident, and therefore tax resident, when he/she has left South Africa with the intention to establish his/her place of ordinary residence in another country. SARS will only confirm this cessation of residency after they have accepted the relevant application accompanied by documentation that supports the intention to cease ordinary residence in South Africa.

If a person is not an ordinary resident in South Africa, he/she may still be regarded as a tax resident if he/she qualifies in terms of the Physical Presence test.

An individual who has become a tax resident of another country via the application of a double tax agreement will also cease to be a resident for tax purposes in South Africa.

It is advised that you obtain a Tax Status Certificate confirming your status as a non-resident as soon as possible. It is strongly suggested that a specialist in this field is consulted to assist with the process.

Be mindful of the deemed capital gains event on worldwide assets on the day your South African tax residency ceases which can incur interest and penalties if not included in the relevant tax return when residency ceased.

South Africans no longer need to formally apply for exchange control exemption via the Financial Surveillance Department (FinSurv). However, this does not mean that emigrants can freely remit funds offshore. “They still require a verification process that could include a risk assessment. Those residing abroad enjoy a R1 million discretionary allowance annually and R10 million investment allowance that requires more stringent verification subject to SARS approval.” Louw says it’s vital to ensure that you arrange Approval for International Transfer (AIT) prior to emigration to ensure access to capital abroad.

EMIGRATION WITHDRAWALS FROM PENSION FUNDS

Changes to Regulation 28 of the Pension Fund Act raised the allocation of offshore funds to 45% of the value of a retirement fund. “This allows all investors to benefit from an increased offshore investment exposure to protect the value of their retirement savings from the devaluation of the rand,” says Louw.

Louw warns emigrants to be aware of the three-year rule for access to retirement funds before retirement from the fund, regarding access to the capital as a lump sum payment. The rule is only applicable to retirement annuities or preservation funds prior to retirement where a single withdrawal is made. There are a number of administrative processes to follow, and the emigration withdrawals are generally taxed at the withdrawal tables in South Africa. In some instances a Double Tax Agreement may apply and lump sum withdrawals may be taxed in the new country where the person has become tax resident.

In addition, the capital from a retirement fund that was used to purchase an income stream such as a living annuity and guaranteed annuity, cannot be taken offshore.

THE IMPLICATION OF FINANCIAL EMIGRATION FOR TRUSTS

“Consider structuring of your assets in a tax efficient investment vehicle or in a tax effective jurisdiction. Your existing investment structures, including local and offshore trusts and companies, should be revisited. Specialist legal and tax advice is required. The optimal structure is to have your investments in a tax jurisdiction and investment structure that allows you to live where you wish and to ensure stability of funding from your investment to support your lifestyle in the currency of your choice.”

CONCLUSION

“The selection of a jurisdiction for your family savings, and investment products and investment structures should be carefully considered. It is recommended to obtain specialist advice from a fiduciary and tax expert to avoid negative financial implications. Your investment structures and investments may have been perfectly suited to your family while in South Africa, but these structures may now require some careful changes to ensure optimal investment and wealth protection and wealth transfer to the next generation.”

Louw advises prospective emigrants to ensure that their families are emotionally invested in the relocation decision. “Many families have returned due to incompatibility with the change of environment, culture, weather, and challenges. This is an emotionally draining and very costly exercise. So be sure you are all on the same page, as it can have a big impact on your family, wealth and well-being,” concludes Louw.

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