New tax legislation will have a significant effect on South African expatriates living and working abroad. As of 1 March 2020, SARS has announced that South African tax residents currently working overseas will be required to pay tax of up to 45% on their foreign employment income, where it exceeds the R1 million threshold. This includes benefits such as travel and housing, which usually form part of most expatriate packages.
As a result, tax practitioners and financial advisors have suggested to clients that only if they apply for financial emigration and change tax residence status to that of non-resident, will they qualify as exempt.
Financial emigration, however, does not automatically equate to non-residence, cautions deVere Acuma’s Head of Africa, Gavin Smith. “It is not as simple a solution as it seems.”
Smith says that, at this point, financial emigration should not be implemented as a knee-jerk reaction to the new expatriate tax laws. “It’s a serious decision with long term implications that requires careful consideration.”
For starters, for many South Africans living abroad, financial emigration may mean that they will not be able to achieve their ultimate financial goal – that of retiring in their home country. “While this may not seem concerning at present; aspirations change with time and age, as do family circumstances – while not returning to SA now may not seem like the end of the world, who is to say the situation won’t change,” Smith argues. “Should an expatriate return to SA within five years after financial emigration, SARS will deem it a failed emigration and all taxes for that period will be liable.”
For expatriates operating according to the 183/60 day principle (the income made for every 183 days spent working outside of SA is exempt from tax), financial emigration is a case of going from one extreme to the other, says Smith, explaining that there is an inevitable financial burden when one goes from paying no tax at all to paying tax in the currency of the host country.
Another crucial factor to consider is the capital gains implication – the exit charge from a capital gains perspective is at a minimum effective rate of 18% on worldwide assets, another financial weight that most would not have budgeted for.
Smith argues that financial emigration is but one tool available in the expatriate toolbox. “For example, investing in a foreign pension scheme is an effective way of storing foreign income, tax efficiently,” he says. “Such schemes enable people to invest in primary currencies that are less susceptible to fluctuations than the Rand, in highly credit rated and regulated jurisdictions. These funds have the benefit of being accessible to investors from the age of 50 (South Africans retire earlier than other countries), which means they can return to SA, which is a relatively cost-effective country to live in, with a decent amount of capital.”
“It goes without saying, however, that these kinds of investments should only be entered into with the correct advice,” he adds.
Ultimately, most South Africans working abroad are not tax experts. To this end, Smith stresses the importance of receiving the correct advice when making any decisions around the new expatriate tax. “Long term specific advice with respect to financial planning is imperative before any changes are made, and this includes financial emigration,” he concludes.
Read more about the South African Expat Tax rules