An amendment to the South African Income Tax Act, which will have hard-hitting consequences for South Africans working outside South Africa, will come into force in March 2020. South Africans earning an income abroad should be considering their options.
Currently, South Africans working abroad for more than 183 days (of which 60 days are consecutive) are able to earn income free of South African tax. Following the enactment of this amendment, South Africans will be required to pay tax in SA of up to 45% of their foreign employment income once it exceeds ZAR1 million (approx. US$75,000) per annum.
Although this threshold may seem reasonable, employment income for this purpose includes allowances and fringe benefits like the provision of housing, security and flights, among other things. It is also likely that pension contributions will be included in the threshold.
Living in a place like Dubai or the UK, for example, is expensive. How do you maintain a standard of living and also pay tax on your foreign income?
“Doing nothing certainly isn’t advisable, so South Africans will need to assess their situation as soon as possible,” says Bryony Oostingh, consultant at Sovereign Trust SA. “Broadly there are three options available – moving back to South Africa, setting up a structure to limit your liability and protect your foreign income and assets, or financial emigration.”
Financial emigration is the formal process of cutting all ties with SA and informing the South African Revenue Service (SARS) and the South African Reserve Bank (SARB) that you are no longer ‘ordinarily resident’ in SA. Formal emigration can impose a lot of restrictions on assets remaining in SA, as well as assets that you might want to acquire in SA. It can also have significant capital gains tax implications.
“Any South African who has been an expatriate for a long period and who ‘emigrates’ just before March 2020 can expect their action to be viewed with suspicion,” says Oostingh. “However it may still be a good option for someone who has been living abroad for the last 15 years, has acquired citizenship abroad, and has no intention of returning to SA.
“It may also be beneficial for South Africans who expect to inherit more than ZAR10 million. Financial emigration should enable a potential inheritance to be paid to them directly offshore rather than to South Africa, which would then require them to seek SARB approval and SARS clearance to transfer the funds abroad using their foreign investment allowance. This is currently set at ZAR10 million per year.”
In terms of compliant tax-efficient structures to preserve foreign assets and income, Sovereign recommends setting up an offshore professional services company in a tax friendly jurisdiction that could invoice an international employer. However, careful consideration needs to be given to the new substance requirements introduced in most of the offshore jurisdictions.
Another option to consider would be an investment portfolio housed within a Sovereign Conservo International Retirement Plan (Guernsey 40ee) – especially if retirement contributions fall into the threshold
“This will minimise your tax exposure. The Guernsey-based Conservo is exempt from capital gains tax on the initial capital invested and there is no income tax levied on interest earned,” says Oostingh. “Potentially there will also be no estate duty, which makes it an efficient succession planning mechanism.”
“In essence, South Africans have less than 12 months to decide whether they will formally emigrate or not. If not, they will need to ensure that they have legally compliant tax structures in place if they want to maintain the lifestyles to which they are accustomed.”
Sovereign can assist South African expats in respect of either option. For further information or to set up an appointment to discuss your particular situation, please contact Bryony Oostingh by email or by phone on +27 21 418 2170.