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The tumultuous rand and financial emigration

20 September 2021 Gareth Stokes

In the past 24 months the South African rand has traded as low as R19.26 to the dollar, and as high as R13.42, confirming its status as one of the most volatile emerging market currencies. Financial advice professionals need to keep a close eye on foreign exchange ‘crosses’ and trends, because the financial transactions they advise clients on frequently result in large capital sums going offshore. According to Tim Powell, Director of Forex at Sable International, the rand faces three short-term risks: domestic uncertainty, the threat of inflation out of the United States and the possibility of the country losing its emerging market status. He was presenting on the outlook for the domestic currency at the 2021 Sovereign Trust International Retirement Seminar.

Too many factors weighing on the rand

Powell took 20-minute to share his views on the domestic currency as well as discuss recent changes to the South African Reserve Bank’s (SARB’s) exchange controls. He opined that the rand’s most recent slide could be blamed on economic and political uncertainty caused by the July 2021 civil commotion in Gauteng and KwaZulu-Natal and the ensuing Cabinet reshuffle. “Financial markets do not like uncertainty, and until there is a better understanding of policy, the markets will adopt a wait and see approach,” he said. Domestic policy around expropriation and the ongoing threat of nationalisation of the SARB have undoubtedly weighed on the rand over time; but a bigger threat to the currency comes from global factors that South Africa can do little to ward off. 

“The rhetoric which I think will affect the rand most is the threat of inflation and increasing interest rates out of the US,” said Powell, who forecast that rising US interest rates would be particularly damaging to the rand. Another concern centres on what might happen if the rand were to lose its place in the basket of 24 emerging markets currencies. Although such event is little more than conjecture at this stage, Powell noted that the rand’s current volatility would seem tame compared to the price movements one might expect if it were grouped with other low-income, developed market currencies. For now, local investors and savers can expect the long term devaluation of the rand against the dollar, euro and pound to continue; with the usual volatility ‘kicker’. 

Each economic, political or social shock that rocks South Africa Inc is followed by queues of anxious investors looking to take some of their capital offshore. It is for this reason that financial planners also need to stay informed of SARB foreign exchange regulations. Powell said there had been two key changes in exchange control in the current year. The first was the removal of financial emigration, which had been well-telegraphed by the South African Revenue Services (SARS). “On the 28th of February 2021 you could financially emigrate and from the 1st of March 2021 it was no longer an option,” he said. The second is that the R1 million single discretionary allowance falls away once someone tax emigrates. 

Tax authority to preside over the capital exodus

Under the old system, SARB oversaw a time-consuming financial emigration process. From the 2021/22 tax year, SARS is responsible for ensuring that applicants are compliant in order to receive any payments while living overseas, specifically their retirement annuities and inheritance payments. “They have also added a three-year waiting period that [requires your client to] have tax emigrated and demonstrated that they have been taxpayers in another jurisdiction for three consecutive years before they can encash their retirement annuities,” said Powell. The change is seen as an attempt by the tax authority to clear up confusion and to put an end to the “scare mongering” by certain tax and emigration advisers, who advocated financial emigration as a means of tax emigration. The argument that financial emigration completes the tax emigration process is now null and void, because the former no longer exists. 

The now defunct financial emigration process was mostly used by the under-55s to encash their retirement annuities, with a handful of high net worth (HNW) families using the process to move large sums offshore. We refer here to HNWs with assets in excess of the R22 million annual restriction, per couple, achieved by using the single discretionary allowance and the R10 million tax-cleared foreign investment allowance. “Financial emigration allowed a family to take everything with them … and I remember applications in excess of R100 million,” said Powell. The process required getting tax clearance from SARS, getting SARB approval and then opening a blocked rand account to allow funds to flow across borders. 

In future, these HNW individuals will have to avail of the tax emigration process that is now more closely linked to exchange control. “You cannot choose to tax emigrate; tax emigration is a function of an individual satisfying the ordinary and physical presence tests in the tax legislation,” said Powell. He urged financial planners to seek out expert tax advice for clients who were undertaking the complicated process. The reason is that tax emigration triggers a deemed capital gain event which requires careful consideration in light of a client’s individual financial circumstances. Your clients will also have to notify SARS of their tax emigration, with special attention given to the exit date, which then becomes integral in calculating exit tax and capital gain tax (CGT) dues. 

The tax net is thrown far and wide

It is worth reflecting on a South African citizen’s pre- and post-emigration tax situation. Pre-emigration, as a South African resident taxpayer, you are taxed on both your worldwide income and on your worldwide capital gains… Post-emigration, as a non-resident taxpayer, you will continue to be taxed on any South African sourced income; but your worldwide income and worldwide capital gains are taxed in your new jurisdiction. The astute among you will see the problem here; and SARS was aware of it too! 

“SARS is saying that on the day your client tax emigrates, there is a deemed CGT calculated on his or her worldwide assets,” said Powell. This can create some panic as taxpayers frantically set about calculating their base costs and obtaining up-to-date market valuations. The CGT ‘trigger’ could also introduce serious liquidity constraints. Imagine, for example, you had bought a flat in Central London in the late 1980s or early 1990s. 

It will be interesting to see how far back SARS goes in reassessing previous financial emigrations and / or revisiting individual taxpayers who have not completed the tax emigration process correctly. Powell thought it unlikely that SARS would be overly concerned with those who had left the country a decade or two ago. But it would be wise for those who may have triggered a deemed CGT event in recent years to get their tax affairs in order. As for those who choose to stick with South Africa for the long haul, they can continue to use existing exchange control allowances to gradually move assets offshore. 

Nothing simple about inheriting offshore assets either

In closing, Powell commented that inheriting offshore assets from South African residents, whether or not those persons were tax resident at the time of death, would become topical in coming years. “So many people may have funds overseas; it is important that those funds are authorised [by the SA tax or exchange control authorities] and that there is a track record or an audit trail that they are authorised,” he concluded. And that suggest plenty of additional advice and consulting opportunities for financial advisers and planners who have clients with international assets. 

Writer’s thoughts:
There are thousands of South African taxpayers who have taken money offshore over the years, either using their annual offshore allowances or due to having worked in foreign countries, and leaving banks accounts or investment there. The question is whether these South Africans can satisfy SARS as to the source of funds. Are you confident that your clients’ offshore investment are correctly authorised? And how would you go about cataloguing such offshore assets to normalise a client’s tax affairs? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]

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