Beware the tax obligations when emigrating

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De Wet de Villiers is the director of private clients at AJM Tax.
De Wet de Villiers is the director of private clients at AJM Tax.

If you are emigrating, you must plan appropriately for any future adverse tax implications.

With many South Africans slowly opting to relocate abroad and with a potential world after the Covid-19 pandemic showing signs of greater freedom to work from almost anywhere, there are many people leaving South Africa for good. The permanence of this relocation is highly likely to result in those people ceasing their tax residency in SA.

When a person ceases to be a South African tax resident, they trigger a deemed disposal on their worldwide assets and a taxing event is created irrespective of the assets not being disposed of. This results in a tax bill becoming payable, for which there may not necessarily be sufficient liquidity to cover the tax obligations. This article will look to cover some of the more peculiar tax effects that can take place because of the deemed disposal, and which may sometimes feel counterintuitive.

Where a person holds investments in a South African tax-free savings account (TFSA), that asset would typically be free from triggering a tax bill in terms of the deemed disposal rules. Considering that the person holding the TFSA would in future be tax resident in another country and the source of the funds in the TFSA would be from a South African source, one would need to consider the double tax agreement (DTA) between SA and the new country of residence to determine where those funds will be taxed once actually disposed of.

The typical DTA that SA has with other countries, particularly those models that are based on the Organisation for Economic Co-operation and Development (OECD)’s prescriptions, would require those shares to be wholly taxable in the country of tax residence.

The situation becomes rather unfortunate in that most countries do not recognise the South African TFSA as being tax free. As a result, the tax-free status of the investment becomes largely null and void, and the taxpayer would lose out on the benefit. Consequently, the best option would be for the taxpayer to realise their tax-free investment prior to ceasing their tax residency to capitalise on the tax-free status of the existing growth. Accordingly, this would not trigger a taxing effect for the taxpayer and the taxpayer would be able to reinvest those funds in another offshore account. The best-case scenario would be where a taxpayer relocates to a jurisdiction that offers a similar regime, as is the case with the UK and its individual savings accounts (ISA) regime.

The other unforeseen consequence that comes about because of ceasing to be a tax resident is that your assets held (including your South African TFSA) are not necessarily rebased from a tax acquisition cost perspective (known as base cost in SA) in the new country of residence.

This means that while you would have triggered a disposal in SA on the difference between your base cost and market value of the asset, the new resident country would – on disposal of those assets – still calculate the gain based on the difference between the proceeds and your original acquisition date cost.

This could in some instance lead to a form of double taxation. Therefore, by disposing of the assets, while being a South African tax resident, and then reinvesting those positions once you have ceased to be a South African tax resident, you ensure that your assets are effectively rebased. This is because, for purposes of calculating the tax on actual disposal, your assets would be regarded as having been acquired at the amount that you invested after ceasing to be a South African tax resident, as opposed to the amount at original investment.

Accordingly, while there is little that can be done to avoid the tax from being triggered on the deemed disposal when ceasing to be a South African tax resident, it does allow for a good opportunity to plan appropriately for any future adverse tax implications.

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This article was written exclusively for finweek's 30 July newsletter. You can subscribe to the weekly newsletter here.

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