Tax emigration, financial emigration, formal emigration, physical emigration – what’s the difference? Is there a difference? Whether you’re living abroad already or you’re still planning on leaving South Africa in the future, if you’ve been doing your homework on the Taxation Laws Amendment Act 2020, you’ll know that there is a difference between these processes. Let’s take a look at what’s changed for expats living abroad and what’s involved.
Physical emigration: this one is fairly self-explanatory. Physical emigration is the act of departing South Africa with the intention of relocating elsewhere permanently.
Financial emigration: Before the Taxation Laws Amendment Act 2020 came into effect it was possible to apply to the South African Reserve Bank (SARB) to have one’s status changed from resident to non-resident for exchange control purposes. This was called formal emigration because the individual formalised their financial exit with SARB. While financial emigration was not compulsory, one of the benefits of an exchange control status change was that the individual could then access and withdraw their South African retirement savings, and transfer the proceeds abroad.
Changes to South African tax law came about in March 2021 when legislation determined that the process of formal emigration was to be phased out. Instead of applying to the South African Reserve Bank to have one’s emigration formalised, the process has since been replaced by tax emigration, for which individuals must meet a number of requirements in order to satisfy the South African Revenue Service (SARS).
Tax emigration: Previously this was the way you’d terminate your obligation to pay tax on worldwide income in South Africa, this is now also the process through which South African expats can access and withdraw their retirement annuity savings before the age of 55. Now, in 2021, if you want to cash in your retirement annuity before you retire, you’ll need to cease being a South African tax resident by completing tax emigration through SARS.
Tax emigration vs Financial emigration
What is tax emigration from South Africa?
Tax emigration is the process of notifying SARS that you no longer fall into their exclusive tax jurisdiction and that you would like to change your status from resident to non-resident for tax purposes. As a tax resident, you will be expected to pay tax on your worldwide income and your worldwide asset base, but when you change to a non-resident for tax purposes, you will only be taxed on your South African sourced income and South African sourced asset base.
What are the tax implications of emigrating from South Africa?
Everything in life has consequences, and tax emigration is no different. Before you decide to undertake tax emigration, you should weigh up all the pros and cons and be sure you’re making the right move for your financial future. What are we referring to? Capital Gains Tax, of course. If you’re not prepared for this outcome, you could be in for a nasty surprise as the day before you become a non-resident for tax purposes, you will be deemed to have disposed of your worldwide asset base at market value, triggering a Capital Gains Tax (CGT) event, commonly known as an exit charge. That’s right. SARS takes one last swipe at your money before you take it away with you.
Tax emigration from South Africa: what’s different in 2021?
To recap, the main differences between tax emigration and formal emigration:
- Formal emigration was never compulsory, while tax emigration is compulsory unless you intend to continue paying expat tax in South Africa on your worldwide earnings.
- Tax emigration is also required if you intend to cash in your retirement savings and move your money out of South Africa.
- Unlike formal emigration, however, tax emigration does not offer an immediate avenue of access to your retirement annuity, and you will have to maintain your non tax resident status for a minimum of three years before you can apply for early withdrawal.
Why else would you want to complete tax emigration?
As mentioned previously, once you’ve completed tax emigration, you can access your South African retirement funds. Provided that you have maintained your non-resident status for a minimum of three years, you will be able to cash in your retirement funds early and move the proceeds abroad after tax. To do so you will need authorisation from SARS, so you will need to be tax compliant before you can access these funds.
FinGlobal: tax emigration specialists for South African expats
Need a hand taking care of all the paperwork involved in tax emigration from South Africa? FinGlobal can take care of everything for you, from start to finish. We can also assist you with everything from retirement annuity encashment to obtaining tax clearance from SARS.
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Thanks for explaining this, super helpful and very clear info. Much appreciated.