South Africa Budget: increases expat tax exemption, ends financial emigration

South African Finance Minister Tito Mboweni announced, as part of the Budget speech on 26 February 2020, two significant changes for South Africans living overseas – the “administratively burdensome” process of emigration through the South African Reserve Bank (SARB) is to be phased out from March 2021, while the tax exemption on foreign remuneration for a South African resident will increase from R1 million to R1.25 million on 1 March this year.

Mboweni said that South Africans who have been living abroad for many years have increasingly opted to emigrate or break their ties with the SA in an effort to avoid the so-called ‘expat tax’, which was brought into effect on 1 March.

Under the ‘expat tax’, South Africans working overseas but remaining tax resident in South Africa were only to be exempt from paying tax on the first R1 million they earn abroad. The rest of their foreign earnings – including all fringe benefits, like housing, education and flight allowances – will be taxed at the standard SA tax rates for the year. As a result of the Budget change, the R1 million exemption has now been extended to R1.25 million.

According to the speech: “Following reforms to the income tax treatment of South African tax residents who receive remuneration outside the country, government proposes to remove the exchange control treatment for individuals, while strengthening the tax treatment. The intention is to allow individuals who work abroad more flexibility, provided funds are legitimately sourced and the individual is in good standing with the South African Revenue Service (SARS).

“Individuals who transfer more than R10 million offshore will be subjected to a more stringent verification process. Such transfers will also trigger a risk management test that will include certification of tax status and source of funds, and assurance that the individual complies with anti-money laundering and countering terror financing requirements prescribed in the Financial Intelligence Centre Act (2001). This will be phased in by 1 March 2021.”

The emigration process will now shift to the SARS and there will be a validation confirmation process to see when the Section 10 foreign income exemption is applicable. Tax residency for individuals will continue to be determined by the ordinarily resident and physically presence tests as set out in the Income Tax Act (1962).

South Africa participates in the automatic sharing of information between tax authorities on individual’s financial accounts and investments under the OECD common reporting standard (CRS). Mboweni said these cooperative practices will remain in place to ensure that South African Tax residents who have offshore income and investments pay the appropriate level of tax.

Under the new system, natural person emigrants and natural person residents will be treated identically. Additional restrictions on emigrants – such as the restrictions on emigrants being allowed to invest, and the requirement to only operate blocked accounts, have bank accounts and borrow in South Africa – have been removed.

The rules for emigrants withdrawing funds from retirement funds – pension preservation funds, provident preservation funds and retirement annuity funds – will also be amended because these required proof of the SARB emigration that is to be phased out. It is proposed that the trigger for individuals to withdraw these funds be reviewed. Any resulting amendments will come into effect on 1 March 2021.

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