Considering financial emigration? Keep this in mind

South Africans choosing financial or investment emigration increased significantly recently due to factors such as the weakening local currency, rolling blackouts and high unemployment. It is not an easy choice and you have to be careful when it comes to paying tax, funding your retirement, managing a trust or doing wealth transfer.

Recent data shows that many wealthy South Africans consider some form of emigration. In the past decade alone, approximately 4 500 high-net-worth individuals left South Africa, with many families opting for host countries that offer attractive residency and citizenship programmes, Christelle Louw, advisory partner at Citadel, says.

“A major factor driving this trend is the weakening rand, which currently clocks in at a depreciation of 13.6% over the past year-to-date. Accompanied by South Africa’s dismal unemployment rate at 32.9% (among the highest in the world), country risk and despondency are driving people to diversify their wealth and earn in currencies that do not devalue,” she says.

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Popular emigration destinations for South Africans include Portugal and Gibraltar in southern Europe, the Caribbean, the United Kingdom and commonwealth countries, such as Australia, New Zealand and Canada, while Switzerland and nearby investment destinations, such as Namibia and Mauritius also recently gained popularity.

Ordinary residence test

The direct consequence is that when people cease to be tax residents, they are regarded to have emigrated.

“Tax residency is primarily determined by the application of the ordinary residence test. A natural person will be regarded as having ceased to be an ordinary resident and therefore tax resident, when he or she has left South Africa with the intention to establish a place of ordinary residence in another country.”

Louw says Sars will only confirm this cessation of residency after it accepted the relevant application accompanied by documentation that supports the intention to cease ordinary residence in South Africa. However, someone who is not an ordinary resident in South Africa, may still be regarded as a tax resident if he or she qualifies in terms of the physical presence test.

Someone who became a tax resident of another country via the application of a double tax agreement will also cease to be a resident for tax purposes in South Africa. Louw advises that people obtain a Tax Status Certificate confirming their status as a non-resident as soon as possible and suggests that you get a specialist to help you.

She says you must remember that the deemed capital gains event on worldwide assets on the day your South African tax residency ceases can incur interest and penalties if not included in the relevant tax return when residency ceased.

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South Africans also must formally apply for exchange control exemption via the Financial Surveillance Department (FinSurv) but this does not mean that emigrants can freely remit funds offshore.

“A verification process that could include a risk assessment is still required. People who live abroad enjoy a R1 million discretionary allowance annually as well as a R10 million investment allowance that requires more stringent verification subject to Sars approval.”

Louw says it is vital to ensure that you arrange Approval for International Transfer (AIT) before you emigrate to ensure access to your capital abroad.

Emigration withdrawals from pension funds

Changes to Regulation 28 of the Pension Fund Act increased the allocation of offshore funds to 45% of the value of a retirement fund. “This allows all investors to benefit from an increased offshore investment exposure to protect the value of their retirement savings from the devaluation of the rand.”

Louw warns emigrants to be aware of the three-year rule for access to retirement funds before retiring from the fund, regarding access to the capital as a lump sum payment. The rule is only applicable to retirement annuities or preservation funds before retirement where a single withdrawal is made.

“There are several administrative processes to follow and the emigration withdrawals are generally taxed at the withdrawal tables in South Africa. In some instances, a Double Tax Agreement may apply and lump sum withdrawals may be taxed in the new country where the person has become tax resident.”

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Also remember that the capital from a retirement fund that was used to buy an income stream, such as a living annuity and guaranteed annuity, cannot be taken offshore.

Financial emigration and trusts

Louw says in this case you should consider structuring your assets in a tax efficient investment vehicle or tax effective jurisdiction. “Your existing investment structures, including local and offshore trusts and companies, should be revisited with specialist legal and tax advice.

“The optimal structure is to have your investments in a tax jurisdiction and investment structure that allows you to live where you wish and ensure stability of funding from your investment to support your lifestyle in the currency of your choice.”

She warns people must be careful when selecting a jurisdiction for their family savings, as well as investment products and investment structures. Specialist advice from a fiduciary and tax expert can help you to avoid negative financial implications.

“Your investment structures and investments may have been perfectly suited to your family while in South Africa, but these structures may now require some careful changes to ensure optimal investment and wealth protection and wealth transfer to the next generation.”

Louw advises prospective emigrants to ensure that their families are emotionally invested in the relocation decision. “Many families have returned due to incompatibility with the change of environment, culture, weather and challenges. This is an emotionally draining and very costly exercise.”