Beware of the South African expat tax!

Introduction

SA expats will need to make some decisions on their financial future as a tax of up to 45% looms on the horizon through a change in the law. As the founders at TBI are from the UK and based in Mauritius, many of our friends and clients are from SA and have been looking for guidance. If you have any further questions on the article below or would like to be introduced to those who can provide the technical solutions to you, then please get in touch.

This article is intended, in a simplistic way, to illustrate the factors that South Africans must consider, and offer some potential solutions. This is neither legal nor tax advice. Although many South Africans believe that their ties with their homeland are cut, it might not be as simple as that for the South African Revenue Authority (SARS). By March 2020, for those ill-prepared, significant fiscal consequences may await! With the right preparation and guidance, much can be done.

The current law

There is a residence-based tax system in SA. A resident is charged on their worldwide income in SA. Those whose residency is outside SA and are declared a non-resident by satisfying certain criteria are currently exempt from tax in SA for income from foreign employment (earnings).  The basic criteria being someone outside SA for more than 183 days (of which 60 are consecutive) over a 12 month period, all subject to the SARS physical presence test. In short, expat SA residents generally fit into this category.

The change in the law

The amendment to the South African Income Tax Act will come into effect in March 2020. Those from SA that are currently exempt from paying tax in SA maynow be taxed up to 45% of anything earned outside SA over ZAR1 million each year. This ZAR1 million likely includes allowances and fringe benefits such as flights and housing.

This amount of tax would be subject to any Double Taxation Agreement (DTA) in place. In Mauritius for example, which has a 15% tax rate and a DTA, the approximate tax payable in SA would be around 30% for anything above ZAR 1 million (on top of tax in Mauritius). We would recommend speaking to a tax lawyer in SA to find out if you are likely to be subject to the expat tax, based on your individual circumstances before you make any decision.

Options

The options below are not intended to be exhaustive, but simply some of the options available.

  1. Financial Emigration (FE)

This is different to emigration which likely would already have been achieved. FE is an administrative process whereby one cuts all ties with SA via the bodies SARB (South African Reserve Bank) and SARS, informing them that you are no longer ‘ordinarily resident’.

One must be sure about this decision, as if the person returns to SA, then there are various fiscal penalties for failed emigration. If one is sure to cut all ties, then there are various other advantages on inheritance and retirement annuities. Potential risks include Capital Gains Tax (Exit Tax) on residential property in SA.

  1. Setting up a tax-efficient structure

This is where you need the help of a corporate service provider and potentially a tax lawyer. There are a number of vehicles that can be used. A popular option is an offshore professional services company in a low-tax jurisdiction taking into account substance requirements. Another option is an investment portfolio as part of a retirement plan. There is no income tax on interest earned and no CGT. Some of our partners are able to guide you on these options and others.

  1. Move back to SA

There is always the option to move back. Despite the turbulent times, SA is still an incredibly beautiful country, that is cheap to live in.

Conclusion 

Seek professional advice, be prepared, and do what is best for your circumstances. If you would like us to introduce service providers who can provide the structures for you, or introduce you to tax experts who can guide you as to your liability, then please get in touch.

About us

We are a consultancy firm based in Mauritius but with a global reach and network. We assist individuals and businesses with their setup and operations in Mauritius, both business and personal. We are run by English lawyers but keep costs to a minimum through special partnership with other service providers.

Disclaimer

Our aim with our articles is to make them digestible. We cut the irrelevant information. We keep them short and relevant. They are not designed to be legally relied upon. This article contains no legal, tax or financial advice, all of which should be sought from relevant professionals.