By Jonty Leon, Legal Manager (Expatriate Tax) at Tax Consulting South Africa
Financial emigration is the process used by many South Africans abroad to formalise their non-resident status for both tax and exchange control purposes, and which is set to be amended, as mentioned a year ago in Budget 2020, and come into effect on 1 March 2021.
Since the initial announcement, there has been zero public consultation, draft Regulations or anything else publicly released, on exactly what the new process will look like. However, finally the South African Reserve Bank (SARB) has released its comments to authorised dealers on how the new regime will commence.
With the new regime comes a host of positives and negatives. Positive is that the antiquated legislation around exchange control for the process is completely falling away, however on the other hand, the tax treatment of the process will be more stringent with a focus on tax residency only, potentially making it more onerous to overcome the burden of proving non-resident status.
Falling away from the financial emigration process:
– SARB MP336(b) form and application;
– Requirement for an authorised dealer to attest the application;
– Requirement of SARB approval before conclusion of the application; and
– Archaic restrictions on bank accounts after they have been converted into non-resident accounts.
The new financial emigration process will include inter alia:
– A focus from SARS specifically on tax residency in terms of the South African tax residency tests;
– The application for an Emigration Tax Clearance Certificate, with supporting documents to prove non-resident status;
– An “exit tax” calculation on worldwide assets, in terms of section 9H of the Income Tax Act;
– A stringent audit by the SARS auditors and potentially by the dedicated SARS Foreign Employment team; and
– Approval by SARS before any funds may be expatriated by an authorised dealer based on emigration.
Be Careful – Tax Residency is Complex
Tax residency in South Africa is determined by two tests, namely the Physical Presence test and the Ordinarily Resident test.
Many think that by merely not living in South Africa currently, they are therefore not tax resident of SA. This is an extreme over-simplification and has gotten many in trouble with SARS in the past.
Careful consideration of all aspects of both tests must be undertaken on an individual basis with a taxpayer, determining on a balance of probabilities whether they are able to overcome their burden of proving non-residency.
One must be cautious when rushing into making this declaration to SARS when this is not truthful, or provable with objective evidence. Even making a mistake these days can land one in hot water, especially after the amendment to the Tax Administration Act which removed the term “wilfully” when handling non-compliance. This amendment has provided SARS with greater clout to hand over taxpayers for prosecution, when claiming negligence or a “mistake”.
Being Well Prepared is Key
With a new financial emigration regime at play from 1 March 2021, prepare yourself for a tougher and more complex process in proving non-resident status with SARS.
Ensure you obtain advice on your resident status from a reputable tax advisory firm which has a strong and diverse legal component to its business. Tax residency is based on the interpretation of law – a legal background is essential in ensuring the correct interpretation of your status and facing off against SARS to prove this.
This is normally a process you would want to undertake with a firm which offers international tax expertise, who can cover all aspects of the process as a single solution and who also provide legal privilege which is essential as no part of your personal affairs remain hidden during this process.