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 foreign employment income free of South African tax. Following the enactment of this amendment, many 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.
Doing nothing certainly isn’t advisable, so South Africans will need to assess their situation as soon as possible. Broadly there are three options available, setting up a structure through which you invoice the employer, relying on a tax treaty which gives the other country taxing rights on the expat’s salary or financial emigration, however not in all cases does this make a person a non-tax resident in South Africa.
Financial emigration is the formal process during which you apply to the South African Reserve Bank (“SARB”) to be classified as a non-resident of South Africa. You will also apply for an emigration tax clearance certificate through SARS which will be submitted to SARB. 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. However, it is important note that financial emigration may not be necessary when trying to avoid the expat tax, provided that you meet the right requirements. If you are a tax non-resident South African living abroad and can prove to SARS that the other country has the taxing rights on your salary, because of a treaty tie-breaker in favour of the country in which you are living, the expat tax should not apply.
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. The shareholding of this company should be planned carefully.
Another option to consider would be an investment portfolio housed within a Sovereign Conservo International Retirement Plan (Guernsey 40ee). These plans are named after section 40(ee) of the Income Tax (Guernsey) Law 1975, which allows international Guernsey-based Retirement Annuity Trust Schemes to make payments to non-Guernsey resident individuals without deduction of any Guernsey tax.
There is no limit to the level of contributions or to the fund size, and payments can be structured to suit the individual – a mixture of lump sum and regular income payments that can be made in any recognised currency and at any time. As a result, ‘40ee’ international retirement plans are ideal for internationally mobile South Africans, wherever they happen to be working or residing.
South Africans can use the R10 million foreign investment allowance to diversify their estates and gain overseas exposure. They are also able to move existing offshore assets into the Conservo. The portfolio can hold a wide range of investments, including shares in listed and private companies, derivatives and physical assets, such as art, but consideration must be given to how any investment will provide an income in retirement.
The assets within the fund are free from Guernsey income tax and capital gains tax because they are held in a Guernsey retirement vehicle. As a result, the growth on investments can be optimised from the outset. Counsel opinion suggests that there will only be a taxable event when the growth portion of the funds is accessed. However, if the amount drawn down does not exceed the capital investment, there should be no tax liability for a South African tax resident.
The Davis Tax Committee (DTC) made some recommendations and observations in relation to offshore retirement structures in its second interim report issued in August 2016. It concluded that foreign trust-based arrangements fell outside of the judicial purview of SARS because they are non-resident. There was no reason why an individual should not make use of a foreign pension provided it was used for its intended purpose – to provide an income for retirement.