The three main points directly impacting expats are outlined below.
Apportioning the interest exemption and capital gains tax annual exclusion
The first tax proposals in the Budget Review 2022 addresses apportioning the interest exemption and capital gains tax annual exclusion when an individual ceases to be tax resident.
Section 9H(2)(c) provides that the taxpayer’s next year of assessment will start on the day their tax residency ceases. This can result in the taxpayer having two consecutive years of assessment in a 12-month period.
The question that arises is whether the two consecutive years of assessment in a 12-month period give rise to a doubling up of the exemptions (known as double dipping) and exclusions that a taxpayer has in a period of assessment. In practice there currently seems to be uncertainty with regard to this issue, as there are different interpretations and applications of these provisions.
To address this anomaly, it is proposed in the Budget Review that the legislation be changed to apportion the interest exemption and capital gains annual exclusion between the two years of assessment in such instances.
Cross‐border tax treatment of retirement funds
The second tax proposal focuses on the cross-border tax treatment of the retirement funds of those who cease their South African tax residency.
Expatriate tax has been a topic that has been hotly debated in recent years, and last year the government had to retreat, when it was determined that their plan to tax retirement interest of expats ceasing tax residency would contradict South Africa’s obligations in terms of the Double Tax Agreements (DTA’s) that they have in place with other countries.
Expats who have ceased their South African tax residency already have to pay a capital gains tax when they financially emigrate, and their retirement funds are not currently included in the scope of this “exit tax”. However, it is evident that the government has put a bit more thought into it within this year’s Budget Review and is planning on changing this.
The cross-border tax treatment of retirement funds tax proposal reads as follows –
“Consultation on last year’s proposal regarding the tax treatment of retirement interest when changing tax residence showed that multiple tax treaties need to be revised to ensure that South Africa retains taxing rights on payments from local retirement funds. Government intends to initiate these negotiations this year.” – Page 45, Chapter 4, Budget Review 2022.
What this means is that government now plans on changing many DTA’s from various countries to be able to tax the retirement funds of expatriates who have ceased their financial residency in South Africa but still have retirement funds in South Africa.
According to Thomas Lobban, legal manager of Cross-Border Taxation at Tax Consulting South Africa, this is going to be a monumental undertaking from the government.
“For the government to action this new proposal is easier said than done. The renegotiation process is one that will take a very long time because there is no blanket approach to this. Each country has a different agreement with South Africa, the government will have to individually negotiate with each country again,” explains Lobban.
The goal of Government will be to change these agreements to the effect that South Africa retains its taxing rights on payments made from local retirement funds. According to Victoria Lancefield, Financial Emigration General Manager at Tax Consulting South Africa, when undertaking this adjustment, it must be considered why the various treaties were set up the way they were in the first place.
“Those treaties were initially set up to avoid double taxation of the taxpayer and to avoid evasion of taxes. To ensure fair treatment of the taxpayer and the relevant tax jurisdictions. Any revisions or adjustments must be done fairly and not put any more pressure on the taxpayer or the relevant tax revenue services,” explains Lancefield.
It remains to be seen if the government will effectively follow through with their plans to tax expatriates that have ceased their tax residency, but expatriates, and taxpayers thinking of financially emigrating, should be made aware that there is a probability that it will come to fruition.
“In theory, what the government wants to do can be done, but the practicality of it remains to be seen. With the treaties that need to be amended, negotiations with the different countries and the legislative aspects that need to be tabled, it will be very difficult for this proposal to bear any fruit in 2022,” explains Lobban.
Three year lock up on pension funds
The third key area has already been in place since 1 March 2021 which is the treatment of pension funds of non-residents. South Africans who have ceased their tax residency, are still able withdraw their retirement funds (or any other SA policy) in full from South Africa, if they can show an unbroken period of 3 years as a tax non-resident.
If one intends to withdraw a personal policy in South Africa, one will require a South African bank account in their personal name. Unfortunately, policy providers will not pay to a third party nor an overseas bank account. In addition, for a successful policy withdrawal pay out, the account in one’s personal name should be a non-resident account. Two possible solutions are the conversion of one’s existing bank account to a non-resident status. Or a facilitated Non-Resident Forex Facility.
Opposite of an ostrich mentality
The Budget Review 2022 once again revealed a disproportionate focus on a taxpayer base which has steadily eroded over the past few years. It also shows that SARS has a plan and intends to keep expats in the South African tax net for as long as possible.
Expats must heed the warning and cannot continue to adopt a head in the sand approach. The prudent course of action would be to approach a SAIT registered tax practice boasting skillsets across legal, accounting and forex spheres. These skills are critical when formulating a roadmap to protect your wealth.