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Tax residency, financial emigration and how to structure your offshore investments

Tax Residency

The general rule is that all South African tax residents must pay tax on all their income, irrespective of where it is earned.

SA tax residents who have cash and investments offshore are still required to include these investments in their SA tax returns and they will be subject to normal SA income tax.

When determining tax residency, the first point of departure is whether a person is “ordinarily resident” in South Africa.

You are “ordinarily resident” if:

  • You consider South Africa to be your real home.
  • It is your intention to return to the country one day, if you are working overseas.

If you claim to be ordinarily resident in any country, your actions and circumstances must serve as evidence to prove that you are ordinarily resident. Examples of supporting actions are:

  • Where your most fixed and settled place of residence is located.
  • Where your place of business is located.
  • Where you stay most often, measured over time.

The second point when determining tax residency, is the “physical presence test”. Even if you are not considered ordinarily resident in SA in a specific tax year, you can still be considered a SA tax resident if you pass the physical presence test by spending a certain amount of time in South Africa.

South Africans working abroad

South Africans are taxed on residency and not source of income. i.e. if you are deemed to be a SA tax resident, you will pay tax on your worldwide income.

Currently, the Income Tax legislation includes an exemption for South African residents who render services outside of South Africa. The exemption is for residents that spend more than 183 days outside of South Africa, of which more than 60 days must be continuous. Previously, this exemption had no monetary limit, it was purely based on the number of days worked outside of South Africa as a portion of the total number of days worked during a 12-month period.

The new law that is being proposed from 1 March 2020 is the restriction of this exemption to R1m per annum for an individual who complies. Therefore, earnings above R1m will be subject to normal income tax. The government intends to offer relief if you are taxed on this income in a foreign jurisdiction.

Tax Residency vs. Financial Emigration

Ceasing being a SA tax resident is often confused with “financial emigration”. Financial emigration can occur when a SA resident intends to leave South Africa to take up permanent residence outside of the country. Financial emigration involves requesting approval from the SA Reserve Bank to allow you to be regarded as an “emigrant”.

Emigration has no direct bearing on your tax status and therefore an emigrant can still be considered a SA tax resident. It is important to follow the steps below to cease being considered a SA tax resident upon emigration.

When do you stop being a South African tax resident?

You stop being a South African tax resident when you are no longer ordinarily resident in SA nor resident according to the physical presence test.

  • To stop being ordinarily resident, you need to make a case that you are not ordinarily resident whilst getting clearance from SARS.
  • You cease being a resident by virtue of the physical presence test if you leave SA and stay physically outside of the country for a continuous period of at least 330 full days.

Ceasing being a SA tax resident will include an “exit charge”. This is effectively paying capital gains tax on all your assets, excluding SA fixed property.

Taking retirement funds offshore

Currently, you can only withdraw from your SA retirement annuity if you formally emigrate. From 1 March 2019 you can also withdraw from your SA preservation fund if you formally emigrate, even if you have previously made a partial withdrawal from the fund.

Living annuities in South Africa cannot be withdrawn upon emigration and must continue to remain invested in SA.

Estate taxes and access to offshore investments on death

Individuals require a will and an executor/ solicitor for every jurisdiction in the which they hold assets. This can make winding up an estate and getting access to funds very expensive and can take many years to be finalised. In addition, certain countries have much higher estate taxes than SA.

South African tax residents can avoid an arduous process and higher estate taxes by investing in a specific offshore vehicle, namely an “offshore wrapper”. Please read more about our offshore wrapper here.

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