On 24 August 2021, Anchor hosted the last of a four-part series of webinars entitled Offshore investing made simple: Part 4 – Financial emigration, where Anchor’s Head of Portfolio Management Darryl Hannington hosted the event with Anthony Chait, the CEO and founder of tax and exchange control consultancy, Zeridium providing his expert views on financial emigration. In this article we highlight the most important points from that webinar as it pertains to financial emigration.
Historically, emigration from SA has come in waves, with certain events in the country’s history sparking an increase in emigration. Some of these events include the March 1960 Sharpeville massacre, the 1976 Soweto youth uprising and, more recently, the July 2021 unrest in the KwaZulu Natal and Gauteng provinces. We note that an SA citizen does not necessarily have to financially emigrate to invest offshore but if that decision has been made then what follows will assist with some of the issues and questions a person who is considering financial emigration might have.
In 2017, the change to the foreign employment income exemption was promulgated into law (it became known as the “expat tax”). At that stage the exemption was capped at R1mn, meaning that SA tax residents earning foreign employment income above this threshold would no longer be exempt from tax in SA, effective 1 March 2020. In the Budget speech on 26 February 2020, National Treasury (NT) announced changes to exchange control which could affect South Africans living abroad, particularly around their need to financially emigrate or not. The main change for expats was that financial emigration through the SARB would be phased out from March 2021, and the tax exemption on foreign remuneration you earn as an SA resident would increase from R1mn to R1.25mn on 1 March 2020.
Up until the February 2020 Budget Speech it was business-as-usual, with a system of financially emigrating through the SARB by completing a MP336(b) form – the pivotal document in the process. Once it is lodged with a bank an individual may or may not get tax clearance. The other option was to leave the country and finalise the emigration process at a later stage. However, in his February 2020 Budget Speech, ex-Finance Minister Tito Mboweni announced (for several reasons) that the concept of emigration from an exchange control point-of-view was being abolished.
Prior to that announcement, the October 2010 medium-term budget policy statement (MTBPS) was the watershed moment in terms of exchange control reforms in SA, when the then finance minister, Pravin Gordhan deemed it prudent to make very significant exchange control reforms. These included the coming into being of the single discretionary allowance (SDA) of up to R1mn per calendar year (to which every SA resident over the age of 18 years is entitled) and the foreign investment allowance (FIA), which allows an SA resident to transfer up to R10mn extra abroad during a calendar year. Since then, these amounts have remained the same and, in our view, it would be useful for NT to review these amounts from time to time.
Prior to the October 2010 MTBPS announcement there was an exit levy (not to be confused with exit tax) of 10% payable on any amounts you were eligible to remit offshore. That levy was abolished in October 2010. However, entrepreneur Mark Shuttleworth, who started Thawte Consulting, which quickly became one the largest online providers of digital certificates (which are used to help prove that websites are legitimate), emigrated to the UK in 2009 and had to pay 10% on amounts he remitted offshore. Shuttleworth felt aggrieved following the implementation of the 2010 reforms and he took government to the Constitutional Court. The Constitutional Court ultimately found against him. However, if he had won the case, the ramifications for anyone who emigrated prior to 2010 would have been enormous as all those who emigrated pre-2010 would have been approaching government for a refund of the levy.
From 2010 the exit levy was abolished and any amounts you export upon emigration are not subject to any SARB imposed levy. Then in May 2021, the SARB issued several circulars – 6/2021, 8/2021, and 10/2021 – which prescribe its regulations for the post-financial emigration phase. Circular 10/2021 was used to update the exchange control manual and referred to those pages that were being changed. More recently (in July 2021), the SARB posted an updated exchange control manual. The focal point of this document was the demise of the MP336(b) form, and this finally pulled the shutters down on the old regime of financial emigration.
Emigration – the current process
The concept of financial emigration has now been replaced with tax emigration and the SARB has taken a complete backseat in this and handed it over to SARS to manage. So, the concept of emigration is no longer administered by the SARB but by SARS.
Is it more streamlined under SARS?
The SARB has always been an efficient organisation but during the Zuma presidency SARS was plagued by mismanagement and headed by a commissioner that did the organisation no real service. He was removed summarily by President Cyril Ramaphosa in January 2018. Currently, under the charge of SARS Commissioner Edward Kieswetter, we are seeing it being restored to its former glory. One should not be intimidated by SARS now when dealing with the emigration process. At the end of the day its objective is that if you have paid your rightful tax that is due to the government then whatever releases you require will indeed be provided (this is all done electronically).
Financial emigration: Background
From 1 March 2021, the compliance process has moved to SARS and the process you need to follow to achieve tax emigration now includes the following:
- A SARS tax clearance/emigration certificate or TCR01 form is required. This is the SARS form that replaces the MP336(b) form, which was in place for many years. Unlike in the case of financial emigration, where the MP336(b) form was mandatory, the TCR01 form is not a requirement in every emigration event since it all depends on the individual’s unique circumstances.
- After March 2021, an individual must advise SARS that you will be a non-resident for tax purposes. If your details change in any way you have 30 days to advise SARS and, if you are going offshore, you also have to advise SARS. The ways in which you can advise SARS are:
- Income tax return – tick the box(es): If there is a change in your status or a taxpayer ceases to be resident then the information should be provided in your tax return.
- Changes in the 2021 tax return: Since 2017, changes can be made in the actual tax return Form Wizard on SARS e-filing. The Form Wizard includes a series of questions which will determine the part of your tax return that will open and require an answer. At the outset, when completing a tax return, the following question appears: Did you cease to be a tax resident for the year of assessment – YES or NO? When answering YES, it alerts SARS that you are no longer a SA resident, and it might trigger a capital gains tax (CGT) event. Ceasing to be resident is deemed to happen with the disposal of certain assets for tax purposes. So somewhere in your return you will show the CGT proceeds which will be subject to manual intervention. It usually takes 1-3 weeks and once SARS is satisfied that you have accounted for CGT on your exit from SA, it will provide you with an assessment and you will go through the normal audit procedures and be required to provide supporting documents.
However, the difficulty with that question and the way in which it was worded was that it only asked in cases of ceasing to be a resident in the tax year that you were completing so in a prior year you would not have to answer it. So, how do you advise SARS if it happened in a year prior to 2017? In the 2021 return, the Wizard now has two questions: First it has the same question as above – did you cease to be a resident in the current tax year? Then the second question asks – did you cease to be a tax resident in any other period (and it requires the date in a specific format); are you a foreign person (two parts to the question) or did you cease to be a SA resident for tax purposes at any time?
- The SARS RAV01 form: The RAV01 form is part of the SARS e-filing system, where you update the taxpayer’s details and there is also a provision to show whether that taxpayer has ceased to be a resident for tax purposes, and it asks for the full date on which that happened. The RAV01 updates your records with SARS in the appropriate manner so that if, at any stage, it is brought into question or if you advised SARS incorrectly, or you may have a situation where someone who has left SA has no taxable income and is not filing a tax return, then there is no need for its completion.
- SARS tax clearance – emigration (TCR01 form): The TCR01 form has been in use since 1 March 2021 and is available online. In the form there is a block where, if ceasing to be a resident, you can show assets and liabilities on a snapshot basis (only recording your SA assets). It is not required that you record any foreign assets – for the purposes of this clearance only SA assets are required. If you are looking at taking money with you then it asks the amount of money you are taking, how you will be investing this money, and if you are going to remain an SA taxpayer? Emigrating does not necessarily mean that you are resigning from being an SA taxpayer. All that it does mean is that you cease being taxable on your worldwide income but on SA-sourced income, for example a property in SA you can be taxed on for as long as you own it. So, tax is only on a source basis and not on a worldwide basis.
Impact on citizenship
It is important to note that emigrating is not a forfeiture of your right to citizenship.
- Dual nationality – In terms of the Citizenship Act 88 of 1995 (section 6 requirements) a SA citizen is entitled to acquire citizenship of another country (through ancestry, conferral, etc.) for as long as you meet the Department of Home Affairs’ (DHA’s) requirements.
- DHA requirements: According to the MP336 form, the SARB has always required you to prove if you are emigrating that you have a right of residence in the country to which you are emigrating (visa or passport through ancestry etc.). However, that requirement has not been carried forward under tax emigration and you now merely state the country without including any proof requirement (it appears to have been relaxed). The DHA requires two forms – the first relates to application for determination of your citizenship – where your parents were born, where you were born etc. The second part is a retention of citizenship, so the DHA gives you permission to retain your SA citizenship. Here it is important to approach the DHA prior to getting the citizenship of another country. Since the advent of the COVID-19 pandemic however, the DHA has shut down its department and is working only on alternate weeks. Remember, if you do not get the letter from the DHA and you accept the citizenship of another country there might be issues in the future.
- The Kollapen judgement of the High Court (August 2021): The issue was brought before the court by the Democratic Alliance (DA), stating that many South Africans had left the country but did not complete the formalities in getting the aforementioned permission – the DA believed it was against the constitution to deny those people citizenship just because they did not get the letter. However, Judge Kollapen found against the DA and upheld that the DHA requirements were still in order. Leave for appeal has been applied for and it is highly likely that this will end up in the Constitutional Court.
Exit tax – Section 9H
Section 9H is based on the principle that when you cease to be a resident several things happen including:
- Ceasing to be resident – deemed disposal for CGT: When you die there is also a deemed disposal for CGT purposes so with proper planning you will need to choose the event where CGT is triggered – at emigration or at your death?
- Which assets are subject to CGT on ceasing to be a resident? All your financial assets including shares, unit trusts, collective investment schemes (CIS), etc. if you have not sold any of these as part of the winding up of your affairs, then you would need to get values for these assets and any CGT will have to be paid when you cease to be a SA resident.
- Which assets are NOT subject to CGT? Basically, any fixed property or real estate that you own directly in your own name. In that instance there is a deferral, and you will only pay CGT at the time you sell the asset (there is not an immediate deemed disposal). If you have already left SA and then sell your property as a non-resident for tax purposes, according to section 35A, the conveyancers handling the sale on behalf of the buyer will hold back a mandatory withholding tax from the proceeds of the sale (SARS does not want to come looking for you in your new country of residence) and, at the point of transfer, the CGT or a fixed percentage will be withheld and paid over to SARS. If it was your primary residence, you can mitigate and reduce the CGT or get a refund later (after applying to SARS).
- Fixed properties held through companies: Fixed properties held through companies are subject to disposal if you hold the property indirectly via a company, or a close corporation (many of those are still around). In those circumstances, there is a deemed disposal and there could be a pitfall because when the entity actually sells the property it would trigger a CGT event within the entity as well.
- When is the CGT payable? If there is a CGT liability, it is only payable at the end of the tax year. In the past there was an emigrant’s office where you would have to go to and pay before you leave the country but that is no longer the case. CGT is payable through the normal system at the end of the tax year.
What amounts become payable when you leave and what is the impact on retirement funds?
Retirement Annuities (RAs)
MP336 (b) attested prior to 1 March 2021: The situation re RAs under financial emigration at 55 or younger is that if you wanted to cash-in your annuity, you could do so if your MP336(b) was attested prior to 1 March 2021. This provision has now been amended and it previously said that, in terms of withdrawal from an RA, it is only allowed if the person is under 55 and/or if the person has emigrated.
Three-year lock-up: In its place, SARS has enacted an amendment – a three-year lock up. If you are part of a new regime (tax emigration) you can only cash in your RA once you have been a non-tax resident of SA for a continuous period of three years. You do need to go through the TCR01 process but one of the documents SARS might require is proof that you are not a tax resident. If you have been out of the country (emigrated) for more than 3 years, then you are fine, otherwise you will have to sit out the process.
New proposed amendment to the taxation law amendment bill (TLAB): This bill is still open for public comment. The Association for Savings and Investment South Africa (ASISA), which represents the collective interests of the country’s asset managers, CIS management companies, linked investment service providers, life insurance companies etc., has made a 10-page submission regarding the bill. We believe that once this submission arrives with NT, the legislation will likely be withdrawn as it needs a complete rewrite, in our view.
The background to the legislation is that government is very aware that it loses revenue because of the operation of double-taxation agreements and so on. Therefore, it is saying that, if you cease to be a SA resident for tax purposes and you have any retirement products then you are deemed to have withdrawn those retirement products on the day before you cease to be a tax resident. The system proposed in the new legislation is complicated– you must get a value at that particular date and a tax liability is then determined (albeit not payable) and there is also an interest factor of 7% that gets built into that amount which also has to be determined.
We believe that one major issue with the bill is also where, during the relevant period, a person could move from the withdrawal to the retirement tables being relevant because of their age. ASISA is concerned that the proposed legislation will be preventing the industry from selling RAs completely. We would say “watch this space” once the industry has made its submission.
Exemption contained in section 10(1)(o)
It is anomalous because we have been speaking about ceasing to be a tax resident and this exemption contained in section 10(1)(o) makes it seem as though it only relates those who have ceased to be residents. However, the exemption under section 10(1)(o) applies to a SA tax resident who is an employee and renders services outside of SA on behalf of an employer (South African or foreign) for longer than 183 full days in any 12-month period as well as a continuous period exceeding 60 full days outside of SA in the same period of 12-months (60-day continuous/183-day aggregate/12-month period). The exemption does not apply to non-residents. According to SARS, if all the requirements are met, the resident will qualify for exemption on the entire portion of the remuneration relating to services rendered abroad.
Background to the exemption
The expat tax hype resulted in the SARB, based on good reform, abolishing the concept of emigration. There were unscrupulous emigration boutiques which were creating rumours among people who long ago left SA, saying that (unless they had financially emigrated) SARS could go after them in their new country of residence, which is clearly not the case. This frightened many into unnecessarily applying for financial emigration in huge volumes which filtered through to the SARB.
Threatened total withdrawal of the exemption
Exemption capped at R1.25mn with effect from 1 March 2020
The expat tax rule is a misnomer because it is not a tax on expats but on residents who are working abroad and is now capped at an exemption of R1.25mn but once you cease being a resident, this issue falls away entirely (it applies ONLY to residents).
Financial emigration is becoming increasingly complicated, and we recommend that individuals and families that are considering emigration take advice from an expert before making any final decisions on emigration.
Should you wish to find out how Anchor can assist you in implementing the thoughts and ideas discussed in this article, please contact your wealth manager or email [email protected].