If you thought that emigrating was just a case of “pack up your troubles in your old kit bag and smile, smile, smile”, you are likely to experience more than a grimace or two because of changes to the Income Tax Act.
Allan Gray notes, in an informative article titled Understand the new rules around citizenship, exchange control and tax residency that the concept of “emigration”, as recognised by the Financial Surveillance Department of the South African Reserve Bank (SARB), has been phased out, with effect 1 March 2021. National Treasury has indicated that the reason for this regulatory change is “to encourage South Africans to keep their ties with the country”.
The phasing out of emigration has created even more confusion around citizenship, exchange control (excon) residency and tax residency and how the changes will affect different individuals and access to funds. Carla Rossouw, tax lead, and Jaya Leibowitz, senior legal adviser at Allan Gray, highlight the differences between these three concepts and explain how each may affect your investments transfer out of the country when you emigrate.
Post 1 March 2021
The concept of emigration for excon purposes has now been phased out and the process of controlling an emigrant’s remaining assets via an emigrant capital account has fallen away.
Moving forward, if you leave South Africa to take up permanent residence in another country, you will have to inform the South African Revenue Service (SARS) that you have ceased to be a South African tax resident. If you cease to be a South African tax resident, you will have to request a tax compliance status (TCS) for “emigration” from SARS before being permitted to transfer any funds abroad.
However, the SARB and SARS have confirmed that if you submitted an emigration application to an authorised dealer prior to 1 March 2021, you will be able to follow the previous emigration process.
In a related article titled Tax bills propose additional exit tax on emigrating South Africans, Jean du Toit, head of Tax Technical at Tax Consulting South Africa writes:
The Draft Taxation Laws Amendment Bill (TLAB) contains a particularly jarring amendment which proposes to tax retirement fund interests of individuals when they cease South African tax residency. Du Toit notes that the Income Tax Act No. 58 of 1962 already makes provisions for an exit tax where a person ceases their South African tax residency, but that this section does not apply to interests in retirement funds.
Proposed amendment
The TLAB proposes, in addition to the existing exit charge, to tax the value of the interest in a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund.
It is proposed to create a similar fiction under a new section in the Act where an individual will be deemed to have withdrawn from their retirement fund on the day before they cease residency. However, payment of the tax will be deferred until the amount is actually receivable from the fund. The tax will be levied on the value of the interest on the day prior to ceasing residency and will be calculated in terms of the lump sum tax tables prevailing at the time of payment.
In other words, the tax is triggered when the person ceases residency but only becomes payable when the amount is actually withdrawn. It seems Government recognises that this measure of relief is necessary, as it would have been burdensome to pay both exit charges concurrently.
Reason for change
Since retirement interests are not subject to the existing exit charge, SARS might lose the right to tax retirement interests when they are withdrawn after a person ceases residency but prior to retirement. If a person becomes resident of a country with which South Africa has concluded a double tax treaty, generally, such treaty will give the sole taxing right to that country. By the time the amount is withdrawn, South Africa will no longer have the right to tax that amount.
In other words, the discrepancy between the date of cessation of residency and the date of withdrawal means SARS loses out on the right to tax the retirement interest. This mismatch is exacerbated by the law change that phased out the concept of emigration for exchange control purposes (commonly referred to as “financial emigration”).
Previously, individuals could withdraw their retirement interest immediately upon completing the financial emigration process. This date would generally align with the date of cessation of residency, thereby avoiding the anomaly. Under the new dispensation, a person will only be allowed to withdraw their retirement interest after being non-resident for three consecutive years. The amendment effectively legislated the mismatch in timing, resulting in the prevalence of these cases and necessitating a further law change.
This interesting development would, in effect, constitute a treaty override measure put in place by South Africa to avoid the further loss of tax revenue as a result of the large number of individuals ceasing their tax residency in South Africa. This is just one of the cascading effects of the widely opposed decision to dispense with the financial emigration process.
