Navigating Tax Emigration: What South Africans Need to Know Before Leaving SA

In recent years, an increasing number of South African taxpayers have chosen to end their tax residency in South Africa and explore new opportunities abroad. According to the South African Revenue Service (SARS), over 40,500 taxpayers have made this decision in the past five years. Interestingly, it is primarily young individuals, particularly those between the ages of 25 and 34, who make up the majority of those leaving. The top destinations for these taxpayers include the United Kingdom, Australia, and Portugal.

While Sars doesn’t specifically track emigration, it does monitor changes in taxpayers’ residence status. It’s important to note that even if you emigrate and leave assets behind, you may still have tax obligations in South Africa. Emigration experts emphasise that South Africans relocating permanently or working overseas while intending to return to South Africa should understand their tax obligations to the country. Until you have formalised your non-tax residency status, you are required to pay tax to Sars on your worldwide income as a South African resident.

Understanding Tax Emigration:

Tax emigration refers to the administrative act of informing SARS that an individual no longer meets the requirements of tax residency. Effective 1 March 2021, tax emigration replaced the previous concept of “financial emigration.” South Africa operates on a residence-based tax system, meaning residents are obligated to pay taxes on their worldwide income, regardless of where it is earned.

Determining Tax Residency:

Determining your tax residency status involves a two-step inquiry conducted by SARS, consisting of the Ordinarily Resident Test and the Physical Presence Test.

Step 1: The Ordinarily Resident Test examines whether South Africa is still your primary home. Regardless of the duration spent outside the country, if South Africa remains your “home,” you will be considered a tax resident.

In addition to the Ordinarily Resident Test, SARS considers several other factors when determining tax residency status, including your nationality, the type of visa for your current country of residence, proof of permanent residence in another country (if applicable), a certificate from a foreign revenue authority confirming tax residency, details about South African properties and local business interests, information regarding your social interests and family life (such as memberships in gyms, churches, recreational clubs, etc.), details about your family and the location of your personal belongings, and the frequency and purpose of your visits to South Africa.

Step 2: If you are not considered ordinarily resident in South Africa based on the previous test, you may still meet the requirements of the second test, known as the Physical Presence Test. This test solely relies on the amount of time you spend physically present in South Africa.

To be considered a tax resident under the Physical Presence Test, you must fulfil the following criteria:

  • Spend 91 days or more in South Africa during the current tax assessment year.
  • Spend 91 days or more in South Africa in each of the previous five tax assessment years.
  • Accumulate a total of 915 days or more of physical presence in South Africa during the five preceding tax assessment years.

Meeting all three time requirements indicates tax residency. However, tax residency based on physical presence can be terminated if you spend 330 full days outside South Africa.

Implications for Retirement Savings

Tax emigration is now the only way to access retirement annuity funds before the age of 55. However, you must maintain tax non-resident status for a minimum of three years before being eligible for an early withdrawal.

From a tax administration perspective, you are responsible for notifying Sars of your non-resident status and obtaining a valuation of your retirement fund on the day before you cease to be a tax resident.

If you have a retirement annuity or a “restricted” provident or pension preservation fund, you will need to prove at the time of retirement or withdrawal that you have been a tax non-resident for an uninterrupted period of three years by providing evidence of being a tax resident in another jurisdiction.

For South Africans seeking international opportunities, understanding tax emigration is essential. The process of tax emigration allows individuals to terminate their tax obligations with Sars and gain access to their retirement annuity funds. By familiarising themselves with the criteria for tax residency and adhering to the application process, individuals can navigate the complexities of tax emigration and plan their financial future accordingly. Seeking professional advice from tax and emigration professionals, like our associates, is recommended to ensure compliance and minimise potential risks. See our associates page here.