Formal emigration and changing tax residency are complex processes and may well be the desired outcome for individuals seeking to live permanently in another country, but it is certainly not a quick-fix ” Tax Clearance Certificate. Sometimes, financial emigration needs to be done retrospectively when people physically emigrate and only subsequently recognise the requirement to regularise their status as non-resident for exchange control and tax purposes. SUBSTANTIAL EXIT CHARGES Changing your tax status to non-resident could have significant capital gains tax consequences, as your worldwide assets (with the exception of fixed property situated in South Africa) are deemed as being disposed of at market values. Therefore, 40% of any gain would be included in your income and you will be taxed at your marginal tax rate. This “exit charge” can be quite substantial and you may need to raise liquidity to settle your affairs with SARS. It is important to ensure that your intention to relocate and your affairs are fully disclosed in your tax returns in the year of your emigration, as well as in the proceeding five years. These disclosures could be key if, at a later stage, your tax residency or ability to exit funds were to be examined. COMPLEX RESIDENCY TESTS South Africa’s tax regime is a residence-based system and one’s tax residency status is determined by how much time you spend in the country, where your assets are based, where your family resides most of the time, and the location of your primary residence. In order to become non-resident, individuals must prove their intention to become ordinarily resident in another country and demonstrate the steps they have taken (or are taking) to carry out this intention. Finally, they will then need to meet requirements of the physical presence test by being in South Africa for no more than 91 days in total during the current assessment year; 91 days in total during each of the five years of assessment preceding the current assessment year; and 915 days in total during those five preceding years of assessment. Contravening any of these periods will result in an individual’s tax status being reverted to South African resident. So, one could have formally emigrated, changed your tax residency status and then subsequently be classified as a SA tax resident again. BE CLEAR ABOUT YOUR OBJECTIVES; SEEK PROFESSIONAL ADVICE In conclusion, it is clear that financial emigration is a highly complex, costly and long-term decision and pursuing this path solely to avoid tax is ill advised. Investors should bear in mind that all South Africans have an annual R1 million single discretionary allowance and R10 million foreign investment allowance – both of which can be used for foreign investment and asset transfer without having to change tax residency. While everyone’s circumstances are different, there are numerous factors to consider and it is important to understand the real cost and lifestyle implications before deciding to financially emigrate. As with any major financial decision, it is always advisable to seek professional, expert advice to ensure that your actions and objectives remain aligned and that your investment plan is optimally structured. 14
IT PAYS TO PLAN IF YOU’RE LOOKING OFFSHORE By Kim Rassou, Portfolio Manager at Old Mutual Wealth Tailored Fund Portfolios Incorporating an offshore component into an investment portfolio makes sense for every investor; doing so provides exposure to the world’s leading economies and high growth industries while spreading the investment risk. even individual stocks and property. Without a plan, they tend to build their portfolios from the bottom up, focusing on investments piecemeal rather than on how the portfolio as a whole is serving the investment objective. Amid forecasts of declining domestic growth and extreme uncertainty, when offshore investing seemed the obvious choice, the past few months have shown that no economy is immune to a global crisis. Many will be enticed by projected returns, the buzz around tech stocks, or the sense of security of having dual citizenship that comes with investing in international property. However, in my professional experience, decisions that are influenced by fear, vanity or greed are the worst an investor can make. Do-it-yourself investors tend to focus on the markets, the economy, the asset manager’s performance and The possibility that these decisions are based on an irrational assessment is exceptionally high. Nonprofessional investors tend to “trust their gut” – and generally don’t understand market valuations, nor the underlying forces driving the performance of Facebook, Apple, Amazon, Netflix and Google (the FAANG companies), for example. It follows that these investors wouldn’t necessarily understand, for example, the full impact of COVID-19 on the FAANGs, whether these stocks are currently trading at fair value, or if they’re overpriced or in bubble territory.