Breaking Tax Ties with South Africa: What Happens to Your Assets?

In today's globalized world, many individuals and businesses are finding themselves with assets spread across borders. If you're a South African citizen or a resident, and you’re considering breaking your tax ties with South Africa, you may have several questions about how it will impact your assets, financial situation, and tax obligations. It’s a big decision, and the repercussions can be far-reaching.

In this blog, we will explore what it means to sever your tax ties with South Africa, how it affects your assets, and what steps you should take to ensure that you remain compliant with local and international tax regulations.

What Does It Mean to Break Tax Ties with South Africa?

Breaking tax ties with South Africa typically involves changing your residency status for tax purposes. South Africa taxes its residents on their worldwide income. However, individuals who are not considered tax residents of South Africa are not liable to pay taxes on income earned outside the country.

To break tax ties with South Africa, you need to establish that you no longer meet the criteria for tax residency. South Africa uses a domicile and physical presence test to determine residency for tax purposes.

The Physical Presence Test

The physical presence test is based on the number of days you spend in South Africa over a five-year period. To qualify as a tax resident, you must meet the following conditions:

You must be present in South Africa for at least 91 days in the current tax year (which runs from March 1 to February 28 of the following year).
You must have been present in South Africa for 91 days or more during each of the preceding five tax years.
You must have been present in South Africa for a total of 915 days or more during the preceding five tax years.

If you do not meet these requirements, you can break your tax ties by proving that you are no longer a tax resident.

The Domicile Test

South Africa also considers where your domicile is located when determining your tax residency. If your permanent home is outside South Africa, you might be able to claim non-resident status for tax purposes.

Once you've established that you no longer meet these criteria, you can apply to SARS (South African Revenue Service) to officially change your tax status. But what happens to your assets when you make this change? Let's delve into that.

The Impact on Your Assets When Breaking Tax Ties

When you break your tax ties with South Africa, it’s essential to consider the potential implications for your assets in the country and abroad. Whether you're an individual with investments, property, or a business, or you have family wealth in South Africa, understanding these consequences is crucial.

1. Your Property in South Africa

If you own property in South Africa, it will not automatically be excluded from your estate or tax obligations when you sever your ties with the country. South Africa levies taxes on income earned from property, such as rental income, and on capital gains when you sell property. If you remain a non-resident for tax purposes but still own property, you'll be subject to tax on rental income or any capital gains if you sell the property.

However, your primary residence might be exempt from capital gains tax (CGT) under the primary residence exclusion, but only if the property is your primary residence and not a rental property. When you cease being a South African tax resident, you may also be required to pay CGT on the sale of the property, which could include assets that were previously exempt.

2. Retirement Funds and Investments

Your South African retirement funds (such as pension funds or retirement annuities) are subject to specific tax rules. If you’re planning to break ties with South Africa, you should evaluate the impact on your retirement funds. South Africa taxes retirement fund contributions and distributions, but tax treaties between South Africa and other countries might provide some relief.

For example, when you withdraw your retirement savings as a non-resident, you could be taxed differently than when you were a tax resident. Depending on the country where you establish tax residency, you might be able to benefit from a tax treaty that reduces withholding taxes on retirement payouts. However, some funds might charge exit fees for early withdrawals or transferring them overseas, so it’s essential to plan ahead.

For investments, South African tax laws impose a tax on income from local dividends, interest, and capital gains. If you're no longer a tax resident, you may not be taxed on income earned from your South African investments. However, capital gains tax may still apply if you sell those investments while no longer a resident.

3. Business Interests and Shares in South Africa

If you own shares in a South African company or have an interest in a business, you need to understand the tax treatment of any profits, dividends, or sales. Generally, profits made from South African companies are subject to South African tax, even if you're a non-resident.

For example, if you sell shares in a South African company, the sale may be subject to capital gains tax. However, you will no longer be subject to income tax in South Africa on dividends and interest if you are no longer a resident. You might also be subject to tax on dividends depending on the tax treaty between South Africa and your new country of residence.

4. Inheritance and Estate Taxes

South Africa has an estate duty tax system, which taxes the estate of deceased individuals. If you break your tax ties with South Africa and later pass away, your estate may still be subject to South African estate duty on assets that are located within the country.

The threshold for estate duty is currently set at R3.5 million (as of 2024), and the rate of tax can go as high as 20%. This is important to consider if you have a significant amount of assets in South Africa.

5. Tax on Foreign Income

When you break tax ties with South Africa, one of the benefits is that you will generally no longer be taxed on income earned outside the country. However, South Africa still has a system of "exit tax" when individuals cease to be tax residents. The exit tax is essentially a capital gains tax on your worldwide assets. The South African Revenue Service (SARS) will tax any gains you have made on your assets up to the point you cease being a tax resident.

This means that you will be taxed on the unrealized capital gains of all your assets when you leave the country. It's crucial to understand this concept and plan accordingly if you have valuable assets in South Africa, such as property, shares, or even business interests.

What Should You Do Before Breaking Tax Ties?

Breaking tax ties with South Africa is a significant step that requires careful planning. Here are some steps you should consider before making this decision:

1. Consult a Tax Professional

It's essential to work with a tax professional who is experienced in both South African tax law and international taxation. They can guide you through the process of severing your tax ties and advise on how to minimize any potential tax liabilities. They can also help you navigate the exit tax and advise on the impact of double taxation agreements (DTAs) between South Africa and your new country of residence.

2. Understand the Tax Treaties Between South Africa and Your New Country

Tax treaties are designed to prevent double taxation and can affect how your income is taxed. South Africa has treaties with several countries, which can provide relief from being taxed by both South Africa and your new country of residence. Understanding these treaties is critical for structuring your finances and minimizing your tax burden.

3. Reorganize Your Financial Affairs

Before breaking tax ties, it may be a good idea to reorganize your financial affairs. This could involve selling assets, transferring investments, or moving retirement funds to jurisdictions that offer more favorable tax treatment.

4. Complete All Necessary Paperwork

Make sure to notify SARS of your intent to break tax ties. You may need to complete specific forms, such as the “Tax Non-Resident Status” declaration form, and submit it to SARS for approval. Failing to do so could result in unintended tax obligations.

Conclusion

Breaking tax ties with South Africa is a major decision that can have profound implications for your assets, taxes, and overall financial situation. Understanding the rules and implications, especially around property, retirement funds, and investments, is essential in ensuring that you're not caught off guard.

If you're considering severing your tax ties with South Africa, make sure to consult with a qualified tax professional and carefully evaluate the impact on your assets. By being proactive and well-informed, you can ensure that you manage your assets efficiently and remain compliant with both South African and international tax laws.

Sources & Further Reading:

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