Prepare for new foreign income tax now or get hit hard later

South Africans living and working abroad should be doing more to prepare themselves for the implementation of the country’s new expatriate tax on March 1, 2020.

Under the new legislation, South African tax residents abroad will be required to pay tax to Sars of up to 45% of their foreign employment income, where it exceeds the R1 million exemption threshold.

The only practical ways to avoid doing so are to financially emigrate through a formal process which, as a consequence, ceases tax residency, or to cease tax residency, without the need to formally emigrate.

Many South Africans living abroad aren’t aware of the new requirements or the consequences of choosing to follow the financial emigration or cessation of tax residency route.

My concern as a tax practitioner is that not many expatriates in this position understand what the impact is going to be.

Unfortunately, many expats believe that they are non-residents from a tax perspective, because of the fact that they’ve spent a number of years outside South Africa, and their stated intention is to never come back to the country.

This is simply not the case. Unless you have financially emigrated, or ceased tax residency (without necessarily emigrating), you are still a South African taxpayer as far as Sars is concerned. And this means that you should have been submitting information about your income to the revenue authorities during the years you worked outside the country.

Choosing which option to take isn’t always easy either.

What a lot of expats have discovered as part of this process is that if they cease South African tax residency, there’s a deemed exit charge from a capital gains tax perspective at a maximum effective rate of 18%, which most of them haven’t budgeted for.

This is particularly true of South Africans living in low tax jurisdictions like Dubai – where no income tax is levied – who may have built up substantial offshore assets with tax-free income.

Expatriates in this position need to take a very hard look at their finances and see whether or not it makes financial sense to formally exit the South African tax net and suffer a once-off capital gains tax charge at a maximum effective rate of 18% on their worldwide assets.

Figuring out what action to take can be challenging. It’s an emotionally and technically delicate position with a number of variables to consider.

What is clear, however, is that doing nothing is not an option.

Ruaan van Eeden, managing director, Tax Advisory at the Geneva Management Group.

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