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South African expats in shark infested waters - expat tax law change commencing March 2020

08 August 2019 Claudia Apicella, Head of Expatriate Tax Compliance at Tax Consulting SA

South African expats have been subjected to vast amounts of conflicting information regarding the amended expat law change, causing uncertainty and panic in their preparations for 1 March 2020.

The cause for this is no doubt linked to the many “specialists” creeping out of the woodwork, so to speak, and offering an array of tax relief processes for South African’s residing abroad which ultimately portray “quick fix” solutions or incorrectly completed processes at exorbitant costs.

Many services that are being offered to South African expats, in relation to tax relief mechanisms, are unfortunately not in line with the requirements of the South African Income Tax Act No.58 of 1962’s two tax-residency tests, the South African Revenue Service (SARS) nor exchange control regulations of the South African Reserve Bank (SARB).

What is Financial Emigration?
One of the most common processes being widely publicised is Financial Emigration and has become the weapon of choice when offering South African expats tax relief on their foreign income in preparation for March 2020.

Although, when Financial Emigration is applied for correctly, the process does offer certainty that one has ceased tax residency in South Africa.

The key issue here is that the fundamental steps to achieve this are not always adhered to, thus resulting in a process not correctly done which creates tax exposure for South African expats.

The harsh reality is that many expats are undergoing “Financial Emigration”, taking into consideration only the exchange control aspects thereof, and thus not dealing with important tax implications.

How will I know that my financial emigration is done correctly resulting in non-residence for tax purposes as well as for exchange control purposes?
Nicolas Botha, Tax Diagnostic Specialist at Tax Consulting SA

This is where careful due diligence is needed.

It is imperative that when undergoing the financial emigration process through a service provider, that all compliance steps for the financial emigration process are clearly defined by the provider to the client.

From a client perspective, the best first step will be to determine if the provider is offering financial emigration or formal emigration. These are often referred to as being the same process, however this is not the case.

Financial emigration- is a two-fold process which includes a SARS component dealing with the legal aspects of non-tax residency as well as the formal emigration component dealing with the SARB aspects of exchange control.

Formal emigration- on its own does not fully deal with the tax aspects.

The best way to check this is if the company requests you to outsource your tax affairs to a tax practitioner or consultant - meaning they only assist with formal emigration.

Tax aspect of Financial Emigration
The first step to a correct financial emigration is a tax check or compliance check with SARS.

Once this check is completed a reputable consultant will be able to advise on the best path forward for the process, in order to ensure that all the compliance “boxes” in regard to ceasing of tax residency are “ticked”.

In order to cease tax residency, one must meet the requirements of South Africa’s two tax residency tests and must complete a deemed disposal as per section 9H of the Income Tax Act.

The deemed disposal, is where one is deemed to have disposed of their worldwide assets, and immediately re-acquired them, thus bringing about a Capital Gains Tax (CGT) event – which is often referred to as an “exit tax” from South Africa.

Once the deemed disposal has been calculated, and the CGT event declared, an application to acquire an Emigration Tax Clearance Certificate (ETCC) should be made to SARS.

Acquiring this is the last step in formalising your non-residency from a tax perspective.

Thereafter you can look towards the second part of financial emigration – the exchange control aspects thereof.

Exchange Control Aspect of Financial Emigration
Roger Aires, Financial Emigration Specialist at Financial Emigration.

The SARB process required for a correctly executed financial emigration is actioned after the SARS process, in line with our Income Tax Act and exchange control regulations.

The SARB process once concluded will further confirm one’s emigrant status for exchange control purposes.

For the SARB process of financial emigration, there is no requirement that the individual sell nor dispose of any assets in SA to include shares, trusts, properties and policies.

All assets can be kept as long as they are correctly declared to SARB.

One can also successfully complete the financial emigration process should they have properties that are bonded as well as vehicle finance.

In addition, one can keep SA bank accounts as long as they are with one banking institution with no need to cancel such bank accounts and open new blocked asset accounts with another bank.

Escaping Shark Infested Waters
The crux of the matter is that undergoing the correct financial emigration process will prove one’s intention to permanently reside outside of South Africa which coincides with South African tax residency tests – thus the formalisation of both exchange control and tax residency statuses being noted as “non-resident”.

We strongly recommend that proper due diligence is followed when using a provider for something as important as Tax Residency and Financial Emigration to avoid unwanted tax exposure come 1 March 2020.

Secure a provider who has registered tax practitioners and admitted tax attorneys with a long track record of successfully completed Financial Emigrations to help you navigate into safer waters.

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