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New tax bill and emigration:
what you need to know
Fiduciary and Tax Specialist
Sep 17, 2020
Listen to Anton’s views here:
Here is a transcription of the video:
Good day, everyone. The purpose of this discussion arises from certain questions by our Sanlam Private Wealth client base, in particular about the draft legislation that will be introduced on 1 March, 2021 in relation to emigration requirements and how this will affect people's retirement annuity funds on emigration.
It is important to remember that this is still in bill form and it may change. But the takeaway from this is that I think there has been too much said about the draft legislation, on the basis that it has been ill-conceived or that there are some hidden motives with the legislation, which I don't think is true.
First of all, there is actually no such thing as financial emigration. It doesn't exist. There are basically two concepts: cessation of tax residence, and formal emigration from an exchange control perspective. These are totally separate concepts. On the one hand, you take certain actions to cease to be a South African tax resident. On the other hand, you take certain administrative actions through the South African Reserve Bank to cease to be a South African exchange control resident. The latter is an administrative process.
Just to explain it a little bit more in detail, one can cease to be a tax resident without formalising a person’s emigration. And the other side is also true. You can also cease to be a South African exchange control resident without cessation of tax residence. These two are separate concepts and you don't necessarily automatically cease to be a tax resident when you cease to be an exchange control resident.
In the latest Budget in February 2020, certain announcements were made that the concept of emigration will be phased out. Now, emigration is quite relevant for people who want to get access to their retirement funds. As everybody knows, you can only access a retirement fund before death or on incapacity after the age of 55. The current legislation, however, stipulates that you can access this retirement annuity fund once you have formalised your emigration through the South African Reserve Bank. For people who are younger than 55, they can therefore, once they have formalised the emigration, cash in their retirement annuity fund and actually, after taxation has been applied, exit those funds from South Africa as part of the emigration process.
The newest legislation basically changed the rule, in so far as the trigger for cashing in a retirement annuity will no longer be emigration, but it will rather be whether you have completed a full three years of being a non-tax resident of South Africa. And this is very much in line with the Budget, because the 2020 Budget mentioned that emigration is not automatically a factor that dictates whether you cease to be a tax resident or not. The ‘ordinary resident’ rules still apply. So therefore, under the new legislation, you will then only be able to access your retirement annuity once you have been non-resident for the three-year period.
Now this is not draconian. This is something that is in line with, typically, anti-avoidance provisions. So if you look at section 9C, if a person holds a share for longer than three years, that share is automatically deemed to be capital. In other words, you can't see it as income or a trading asset, and therefore you can only be subject to capital gains. So three years is a general rule that basically says that's a long enough period for people not to be falling foul of anti-avoidance provisions.
The current exchange control regulations have got the same rule. So if you emigrate and you can actually not return to South Africa within a five-year period, you will then as a result be regarded as a failed emigrant and the SARB can force you to bring those assets back.
So the three-year rule is now more tax-driven than emigration-driven, and all these articles in the press that the government is now holding onto your retirement annuity funds for a period of three years, and they’ve given you seven months to do the process before the new legislation comes in is, in my view, a little bit disingenuous. It is not the intention of the legislation. It is really to make the trigger a tax trigger and not an exchange control trigger.
For example, if people have been living abroad already for a long time and they have ceased to be tax resident, they actually don't need to formalise their emigration. They can actually then get access to their retirement annuities, even without emigrating for exchange control purposes. So there's a definite plus in the legislation for those individuals who have been non-resident for three years as at 1 March 2020, because essentially they will be able to access their retirement annuities immediately.
The draft legislation will also in future apply to preservation funds, especially for those individuals who’ve already had their one withdrawal from a preservation fund. Because essentially, if you have before your retirement used your one withdrawal, that preservation fund is also locked in until normal retirement age. So the added bonus in the new legislation is that for people who have got preservation funds, they will also be able to access that. Not on emigration, because that was never the case, but it is actually an added benefit in the new legislation – that preservation funds will also now be able to be cashed in, even if you’ve had your one withdrawal.
Now it's important to remember that pension funds and provident funds in the normal sense are not affected, because any person who resigns from his job can cash in that pension or provident fund as a resignation benefit, pay the tax, and the person doesn't have to emigrate to take the funds offshore because we can utilise foreign investment allowances to externalise those funds. If it’s large amounts, it can be over a period of one, two or three years. So in my view, the new legislation is actually a benefit rather than a negative – I’m just hoping to place this a little bit more into perspective.
Another question we get – when people move from one jurisdiction to another – is whether I can move my pension or my providence fund to that jurisdiction. The answer is unfortunately very short – no, you cannot. South Africa doesn't have pension transportability. This means that you cannot actually move your pension from one jurisdiction, or from your current South African employer, to a new employer in Australia, for example. This is a common occurrence in the UK, in Australia, and in many of those countries where you can move your pension fund. But unfortunately in South Africa this is not available yet.
The only way to get access to your pension when you leave is, as we discussed, in terms of the new bill, being out of the country for more than three years, particularly related to retirement annuities and provident funds where your one withdrawal has already been utilised. For pensions and provident funds, the normal rules apply. You can resign from those funds, pay the tax and exit those funds as part of your foreign investment allowance, or even on emigration if the resignation is done prior to that.
As far as living annuities are concerned, that's one of the things they didn't actually tackle, and we were hoping that they would. Living annuities you cannot access. The only way you can get hold of that, even if you've been a non-resident for tax purposes, or even if you emigrated, is to enhance the payment of the annuity income. At the moment, the current limits are up to a maximum of 17.5%. So the advice we have for clients is to expedite the payment by drawing down the maximum. Yes, you will of course pay South African income tax, subject to the double taxation treaty networks. And then you can also externalise those funds in terms of your foreign investment allowances, or if a person has emigrated under the current rules, then they can be taken out via direct or via blocked rand account.
It is important to understand that in the latest Budget 2020, the Finance Minister also indicated that they are moving away from an emigration basis of protecting the tax base or a South African Reserve Bank basis protecting the tax base, and that the protection of the tax base should rather be on the SARS side, with sufficient legislation and a sufficient risk basis to tackle all foreign evasion and avoidance and these type of things.
One of the tools that they have in their pocket is the common reporting standards (CRS), which have been with us for a few years now. In terms of CRS, any banking institution now has to report to a central database where SARS has access to particulars of any clients or bank account holders, etc. And this is really the reason why emigration is probably no longer a requirement to control the erosion of the tax base. SARS will have sufficient mechanisms and a risk approach basis in place to capture the information – the long and short is that there's no place to hide anymore.
So this is really in my view, the main driver for why emigration is being phased out – SARS will be able to control the tax base, and protect the tax base, especially from a base erosion perspective, as CRS gives them this very powerful tool.
Lastly, although this has always been quite a complex area of expertise, the new legislation has actually made it a little bit worse. A person who wants to cease to be a tax resident must look at his personal set of circumstances. There is no one fit or scenario. The ‘ordinary resident’ test is specifically applicable to every person's particular set of circumstances – hence they call it the subjective test.
For emigration purposes, this is the million-dollar question: how it will actually pan out in terms of the new draft legislation. It makes things a little bit more complex. I would suggest that given all these various complexities, before a person actually takes the jump to leave South Africa (or thinks he is leaving South Africa), to take expert advice on this topic to make sure that if he leaves South Africa, in five years’ time SARS may not come back and say, well, actually you didn't really leave. And they may still assess you in South Africa has a tax resident, although you have ceased, or you thought you have ceased, to be a tax resident.
So emigration in my view – it’s probably good that it is being phased out. A more tax-driven approach is probably more in line with international standards. I would, given the current set of legislation, think that it will be implemented in very much the current form. Thank you very much.
The formation and registration of trusts, and the provision of independent trusteeships – both local and oﬀshore.
The creation of BEE, charitable, special and Shariah trusts compliant with regulatory and legislative requirements.
The administration of deceased estates in South Africa and abroad.
Advice on complex structures, asset restructuring and bequests in foreign jurisdictions.
Advice on emigration and immigration, foreign earnings and the application of any double taxation agreements.
Updating trust deeds to ensure they’re in line with the latest changes in the trust environment.
Updating and/or drafting of wills dealing with South African and/or foreign assets.
Advice on the establishment and management of charitable organisations, their tax status and tax deductible donations.
Advice on the potential tax consequences and reporting obligations if you hold a US passport or green card, or if you have children living in the US.
Guidance on the financial implications of life-changing events, such as getting married, divorce or the birth of a child.
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