Financial Emigration Demystified: South Africans Need The Full Picture

South Africa

Financial emigration is often misunderstood, and with the jump in the number of South Africans applying to move themselves and their wealth offshore, it’s time to unpack the big questions before you dust off your suitcases. International trust and structuring company, Sovereign Trust (SA) Limited, looks at why investing in an off-shore retirement plan can be a less dramatic move that will still offer a tax-efficient way of preserving and growing wealth.

Financial emigration, also known as formal emigration, is the process of changing your South African resident status with the Reserve bank to that of a non-resident. ”Apart from the obvious benefit to South Africans of protecting themselves from certain local taxes and currency volatility, one of the most important benefits is that retirement savings and annuities can be withdrawn and transferred offshore, even if the person is under the age of 55,” says Coreen van der Merwe, Managing Director of the South African arm of the Sovereign Group, which provides international trust and structuring services to South Africans.

Van der Merwe warns that financial emigration has inherent benefits, like certain tax exemptions, but can also be fraught with tax-related, and other, risks if not done hand-in-hand with professional, respected service providers. Many South Africans believe they are 100% tax exempt in SA once they have formally emigrated – this is one of the biggest misconceptions.  

  1. Tax efficiency

When considering moving your assets off-shore, it is critical that you research the tax efficiency of the recommended structures. You need to explore their nature, including where they are domiciled and the costs. 

  1. Where is the money going to be invested?

You also need to understand how your money will be invested and whether the investment strategy will enable you to achieve your goals. The professionals who advise you must be knowledgeable about legislation in more than one jurisdiction, and the advice must take your overall financial circumstances, tax position and estate planning, into account. 

People often want to keep things simple by taking wealth offshore in the form of a bank account in the interest of hedging against the rand. “In this case, Mauritius is an easy option to consider, as the process doesn’t require face-to-face interviews with the bank,” says van der Merwe. Generally speaking, overseas banks request you to fill out a ‘Know your Client’ document which is similar to our FICA. It includes a certified copy of your passport and proof of address, CV, professional reference letter and or bank reference letter as well as proof of the source of the funds. This is not an exhaustive list and additional documents may be required.

Also take into consideration which countries are more difficult to get money out of in the case of a deceased estate and where inheritance taxes (estate duties) are high. Countries that come to mind are South Africa, the UK and the USA to name a few.

  1. Use your foreign investment allowance

Sovereign often advises clients asking about diversification and offshore investments to use their foreign investment allowance to contribute to an international retirement scheme. Choose one that generates future retirement benefits that can be paid anywhere in the world, including South Africa. This type of retirement plan would currently be considered a tax-free pension in Guernsey. The foreign investment allowance is currently R10-million (discretionary) and R1-million (travel) but you can apply to SARS for dispensation to increase this.

The Sovereign Group offers a pension product, called a Conservo, which falls under Guernsey’s regulated international retirement annuity trust schemes (Rats). “Your investment can be a regular contribution and/or a lump sum that was earned outside South Africa, or you can use your foreign investment allowance. However, you can’t claim your contributions to a Rat as a tax-deduction in South Africa, as you can with contributions to a local retirement annuity fund, because the Guernsey fund is not registered under the Pension Funds Act in South Africa,” says van der Merwe.

Does formal emigration mean that you are not considered a SA tax resident anymore? 

Once you’ve formally emigrated for exchange control purposes, you will no longer be a South African tax resident on the condition that you don’t meet the “ordinary resident test” or the “physical presence test” – the two tests in South Africa that determine whether you are an SA tax resident or not. Therefore, your new status does not mean that you will necessarily stop paying South African taxes all together. 

Sovereign outlines that if, for instance, you receive rental income for immovable property you own, then you’ll be liable for SA tax. And, if you decide to sell this property, you will also be subject to capital gains tax. 

You can also throw the concept of tax migration into this mix. “When you live in a country that has a double taxation agreement with South Africa and your permanent home is in that country, you will be taxed on your foreign salary in that country and not in SA,” explains van der Merwe. If on the other hand, you have a permanent home in that country and also in SA, then the question becomes, where is your centre of financial influence? “If the answer is permanent residency in the other country, then SA can’t tax you on your salary – but the same rules as outlined above – apply with regard rental income and capital gains tax if you rent or sell South African property.” There will still be a tax liability in SA. It is also worth noting that this also applies even when you have formally emigrated and broken your ties with SA. 

There are good people with the right answers when it comes to unpacking the baggage around financial emigration and expat tax, just make sure you take off the rose-tinted shades and do the groundwork.  It will make all the difference to mitigating risks and navigating the right path.

The Sovereign Trust (SA) Limited Annual International Retirement Seminar 2019 is taking place in Johannesburg on the 28th of August, and in Cape Town on the 30th August. To find out more information or to register, please go to https://www.sovereigngroup.com/events/sovereign-trust-sa-limited-annual-international-retirement-seminar/ 

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