Tax Emigration and Policy Encashment
The previous process of Financial Emigration has now been phased out, and the new process of Tax Emigration is facilitated entirely via SARS.
This also goes hand in hand with Retirement Fund redemption, with some policies (like Retirement Annuities) requiring you to substantiate 3 years of non-SA tax residency before these can be redeemed.
The new process of RA Encashment
Important update –
Treasury backtracks on proposed ‘exit tax’ on Retirement Funds –
Those who follow our commentary would have seen our previous update re the Draft Taxation Laws Amendment Bill (TLAB) which proposed a new exit tax in respect of an interest in a Pension fund, Pension preservation fund, Provident fund, Provident preservation fund or Retirement annuity fund.
The proposal implied that you would be deemed to withdraw from a RA (for example) the day before you cease to be SA tax resident. In doing so, there would be a deemed tax amount upon that ‘theoretical’ withdrawal – and interest would be levied from that day even though you wouldn’t actually be able to access the RA funds themselves at that point.
We are pleased to report that following extensive stakeholder consultation, Treasury has removed this proposal from the final Taxation Laws Amendment Bill.
They did so on the basis that the proposals would in effect override existing tax treaties – which they indicated would be a breach of good faith and also potentially result in double taxation.
It would also open up the risk of legal action, with the example cited of the Netherlands Government losing a legal challenge for introducing provisions that bypassed existing tax treaties.
For now, this removes the prospect of a more complicated financial/tax emigration process from next year – which would otherwise have had to be reworked to capture this deemed disposal and later account for it at point of policy redemption.
Direct Comment from Treasury:
Taking into consideration that although the rationale behind the amendment is understood by the public, numerous concerns that the amendment will result in a case of treaty override exist and these are noted by Government. Following the extensive public participatory deliberations with members of the public in Parliament and through public participatory initiatives hosted by National Treasury on the 2021 Draft Tax Bills, the proposed amendments regarding the introduction of section 9HC will be withdrawn from the 2021 Draft TLAB and further amendments will be considered in the next legislative cycle in order to address the complexities that were raised through the comment cycle.
Is the phasing out of the old process of Financial Emigration a good thing?
- Yes – because it underscores a macro theme of relaxing exchange control, and it removes some of the red tape around having to engage various entities in the process.
Is the new process of Tax Emigration more difficult to complete?
- Yes and No – Previously the process included having to declare your emigration to the SARB (the Reserve Bank) which is now no longer the case with the new process facilitated entirely via SARS. But at the same time, SARS is now applying greater scrutiny to the tax residency of applicants.
Why would I want to cash out my Retirement Annuity?
- You may want to align your Retirement Asset base with the country you intend to retire in to avoid a mismatch and the risk of Rand depreciation.
- Once you have cashed in your retirement annuity and transferred the funds offshore, there aren’t any restrictions on what you use this money for – so some opt to use the proceeds to enter the property market etc.
What is the ‘Exit Tax’?
- Upon ceasing tax residence, a deemed disposal of worldwide assets may be triggered which can result in a CGT liability to SARS. This is deemed to take place the day before your change in status, and is based on the market value of certain asset classes as if they were disposed of on that day.
What should I do if I have retirement policies which aren’t RA’s?
- If you have retirement policies that aren’t RA’s, you may be able to access those as a lump sum before age 55 without tax emigration. We’ll help you understand the implications, and can simply assist you via our Forex Service to transfer the funds offshore.
Am I a SA tax resident?
- The Income Tax Act defines being resident for tax, and you will be considered resident if you meet the ‘Ordinary residence’ or the ‘Physical presence tests’ and aren’t considered tax resident of another country in terms of a double tax agreement.
What is the difference between being SA tax resident and non-resident?
- The most important difference from the perspective of a migrant is that if you remain tax resident, you are taxed on your worldwide income and need to disclose it in your South African individual tax return. If you are non-resident, you are only taxed on South African source income.
Do I pay tax on redemption of my Retirement Policies?
- Yes – Retirement Policy redemptions are taxed according to SARS Lump sum redemption tax tables.
- Given that you likely received tax relief in the form of a deduction when you contributed, SARS will tax you when you redeem.
- That’s why it’s important to talk to an advisor about what the consequences of cashing it in will be.
What if I don’t have a bank account in South Africa anymore?
- The fact that you don’t live in South Africa anymore is what entitles you to tax emigrate and to access your retirement funds, and we have a streamlined process to set you up an account via our Tax Emigration service into which your policies will pay out.
Does tax emigration impact my South African citizenship or eligibility for a SA Passport?
- No – the process of tax emigration is distinct from your South African citizenship or your ability to obtain a South African passport.