The fiscal pitfalls of relocating abroad from SA

As the world economy continues to rely ever more on mobile skills it is unsurprising that South Africans are increasingly taking up opportunities to relocate to various destinations abroad.

The fiscal pitfalls of relocating abroad from SA

Source: Marco Sella-Rolando, Maitland, London

As the world economy continues to rely ever more on mobile skills it is unsurprising that South Africans are increasingly taking up opportunities to relocate to various destinations abroad.

Unfortunately there are a number of pitfalls that can make such a move disadvantageous. The fiscal consequences of relocation should therefore be considered with as much care as any other aspects of making a home in another country.

Whilst many South Africans are also returning home, a move that similarly holds pitfalls and opportunities, this article deals with relocation abroad from a South African fiscal base only. See related article

Cessation of tax residence
A discussion of the potential pitfalls commences with the immediate consequences of ceasing to be tax resident in South Africa. Whilst the existing law is not prescriptive as to the precise date of such cessation, it is possible to identify a point in time at which the individual no longer considers South Africa to be his or her ordinary and natural home. If this cessation of so-called ‘ordinary residence’ (the primary test for establishing tax residence) is supported by facts pointing toward the establishment of a new ‘centre of gravity’ abroad, and provided the secondary so-called ‘days’ test does not pull the individual back into South African tax residence, he or she will have ceased to be tax resident at that given point in time.

The ‘days’ test bears brief reflection. This test determines the number of days physically present in South Africa in any tax year during which an individual is not ‘ordinarily resident’. The test considers a rolling six-year period (based on tax years and including the tax year in question). If in excess of 91 days are spent in South Africa in each year of such period, and provided that in excess of 951 days in aggregate are spent in South Africa in the preceding five years of such period, the test will bite. It is thus important to carefully manage the days physically present in South Africa following the cessation of ‘ordinary residence’.

Beware the CGT exit charge
On the face of it, ceasing to be tax resident may be considered a good thing. However, the tax legislation determines that such a person is deemed to have disposed of his or her worldwide assets at market value for capital gains tax (CGT) purposes. (This assumption is subject to certain exemptions, including South African fixed property, which remains subject to CGT in the hands of non-residents.)

This CGT ‘exit’ charge may result in a nasty liability determined, effectively, on the difference between what was paid to acquire the assets (plus certain additional allowable expenses) and their market value.  What makes matters worse is that the assets are deemed to be sold – there is no actual sale, and thus no sale proceeds with which to fund the tax liability.  In the case of an individual this liability could be as high as 10% of the gain at current rates, assuming a maximum-rate taxpayer.

Closely-held companies also affected
There are other traps for the unwary. Sole or controlling shareholders of South African companies need to bear in mind that the effective management of that company may cease to take place in South Africa if the shareholder representing the ‘heart and soul’ of that company relocates.

The effect of this at the company level is that the company would cease to be resident for tax purposes in South Africa and would thus be deemed to have disposed of its capital assets at market value. This will result in a further CGT liability (remember, the shareholder has already suffered an exit charge on his or her shareholding), at the company level in relation to its capital assets at current rates of 14.5%.

The bad news does not stop there. Undistributed reserves in the company will be deemed to have been distributed on the company’s cessation of residence, resulting in a liability to secondary tax on companies (STC), determined at the current rate of 12.5% on distributable reserves. (It is worth noting that the STC provisions are currently in a state of some flux with a reduction to 10% and a re-engineering of STC to a withholding tax more in line with other jurisdictions proposed.)

Residual tax footprint
Having addressed some of the immediate consequences of ceasing to be tax resident, there is also the question of a residual South African tax footprint. Whilst tax residence may have successfully ceased, a non-resident for tax purposes continues to be subject to tax in a number of instances. These include tax in respect of rental income arising from, and CGT on the sale of, South African fixed property; taxation in respect of share options and shares arising from incentive arrangements in certain circumstances; and business assets that remain in South Africa.

Migrants need therefore to focus on these assets from a tax- planning perspective, both before and after relocating. They should also bear in mind that assets situated in South Africa generally remain liable to South African estate duty upon the death of the then non-resident, unless estate planning strategies are adopted.

Exchange control
It is also important to consider the exchange control consequences of any move to greener (albeit not necessarily sunnier) pastures. Whilst it may be possible to shake off South African residence for tax purposes and also lessen the pain of the exit and related charges with some early planning, the reach of the exchange control authorities remains pervasive. In short, notwithstanding that tax residence has ceased, the Reserve Bank considers an individual that has relocated abroad, perhaps even with a long-term intention, to remain ‘resident’ for exchange control purposes and thus subject to the exchange control restrictions.

Whilst the technical correctness of this Reserve Bank view could in theory be challenged, it is necessary to plan one’s affairs with this exchange control overhang in mind. In the absence of formal emigration, a person relocating abroad is considered to have ‘temporarily resident abroad’ status, thereby remaining subject to exchange control restrictions.

‘Temporarily resident abroad’
Details relating to the status of ‘temporarily resident abroad’ are beyond the scope of this article. Suffice it to say that it is possible to escape the continued clutches of exchange control by formally emigrating. This process is relatively straightforward and essentially involves the completion of a number of administrative requirements established by the Reserve Bank. However, there is a sting in the tail!  Whilst a number of emigration allowances exist (and whilst it is also possible to agree an expatriation programme in relation to liquid assets subject to the payment of a 10% levy with the Reserve Bank), the emigrant’s South African assets are essentially ‘blocked’ and can only be accessed in certain limited circumstances. Naturally, the extent of the South African asset base is one of the factors that may determine whether a formal emigration is desirable or not.

Plan well ahead
What the above pitfalls clearly illustrate is that the success of any migration strategy depends on early and comprehensive planning. This cannot be undertaken without advice that is able to bridge the divide between South Africa and the end destination.

It is too late to focus on these issues when the green grass of new pastures is underfoot; in fact, a failure to plan properly well in advance will inevitably result in such pastures being more rocky and unwelcome than should otherwise be the case