Many South African expats are hoping that financial emigration solves the problem of paying tax on the money they earn outside the country due to the new SARS South Africa Expat tax rules.
The new way to calculate and pay tax starts in March 2020.
From that date, any South African taxpayer working abroad earning ZAR1 million on more is subject to the new rules.
Income tax is payable on earning of more than ZAR1 million at a rate of 45%.
To escape what is considered a punitive tax by thousands of expats, many advisers are suggesting that they should look at financial emigration.
The problem is financial emigration does not necessarily mean an expat has given up tax residency in South Africa.
Declaring financial emigration just means someone is no longer a South African tax resident in the view of the central bank.
Tax residency is a legal status that an expat cannot change with a declaration, but is decided from a series of circumstances and tests.
But financial emigration may not be needed for expats already paying local income taxes under double taxation agreements. These agreements mean only the difference between income tax charged in South Africa and the rate charged in the expat’s new home is demanded by the South Africa Revenue service (SARS).
Financial emigration would not impact these agreements.
The worst hit expats would be those in zero-tax economies, such as Dubai, Abu Dhabi, Saudi Arabia or one of the other Gulf States.
From March 2020, their tax will zoom from 0% to 45% overnight.
The key tests are if expats are ordinarily resident in South Africa – which means having a home, family and social connections and other ties to the country. Many expats on assignments who intend to return to South Africa would still be considered ordinarily resident and subject to paying the 45% income tax.
If ordinary residence was in doubt, the physical presence test comes next. This looks at the time someone spends in South Africa and expects expats to no longer be resident for a tax year if they can show they spend 330 days in a row outside the country.
Crucially, the physical presence limits do not apply to anyone labelled tax resident.