In recent weeks South Africans living abroad (or planning to move abroad) have been bombarded with articles on how the changes to emigration for exchange control will affect them. Read on to find out how the new exchange control regulations, EFFECTIVE ON 01 March 2021 will impact you.
Immediate changes to withdrawals from pensions, provident funds and RAs
Amendments to the definitions of the terms “pension preservation fund”, “provident preservation fund” and “retirement annuity fund” in Section 1 of the Income Tax Act 58 of 1962 will have an immediate impact on South Africans planning to withdraw their pension funds from South Africa using the SARB process.
If you can prove non-tax residency for 3 consecutive years, you will be able to withdraw your pension from South Africa. This takes away the burden of having to record your emigration with SARB. In short, the changes are welcome news for South Africans who’ve been non-tax residents for 3 consecutive years and who have settled in their new jurisdiction.
What’s more, these changes will ensure that Service Providers can no longer sell “financial emigration” as a commodity that will supposedly free you of all your tax obligations in South Africa.
When is a resident a resident?
The changes put more emphasis on the definition of “resident” as defined in the Income Tax Act and could potentially lead to some (much-needed) new case law. Especially on the “ordinarily resident” test, and how SARS and the courts interpret this when taking into account Double Taxation Agreements.
The new regulations bring South Africa closer to international standards. It is important for South Africans living abroad to not only look at how they can cease their South African tax residency but also to start the process of establishing tax residency in their new jurisdiction according to that country’s domestic legislation.
Clarifying certain misinterpretations regarding recent amendments.
Ever since the amendment to foreign remuneration became effective on 1 March 2020, there has been some misinterpretation of these amendments and how they affect you. I’ve clarified these below:
- There is no such thing as expat tax. It’s not defined in our tax legislation and is merely a marketing word. You are either a tax resident in South Africa or you are not.
- The imminent changes to the withdrawal of pension funds have had no impact on our tests to establish tax residency. The same old rules – the “ordinarily resident” and “physical presence” tests – still apply.
- There have been no new amendments to the foreign remuneration provision stipulated in Section 10(1)(o)(ii). If you’re not regarded as a tax resident in South Africa, this provision does not apply. You don’t need to prove 3 consecutive years of non-tax residency for the foreign remuneration exemption to apply.
Not so fast
South Africans living abroad should not be under the assumption that simply ceasing your SA tax residency will free you from Exchange Control regulations. There are various provisions that could still put you in breach of Exchange Control. For instance:
- Prior approval is required from SARB when beneficiaries receive distributions from offshore trusts and want to keep these abroad (this excludes the founder of the Trust)
- You can’t donate or lend offshore funds to your children living abroad without prior approval
- You still need to place on record any offshore assets inherited from a South African Estate.
Major take-home points
Probably the biggest change is the impact the amendment will have on pension fund withdrawals. For many South Africans living abroad, this will be a very positive development. Beyond this, it’s also really important for you to try to understand how else the changes will impact your unique situation, both in terms of exchange control regulations and for tax purposes.
And whatever you do, please don’t take your advice from Google! There is no one-size-fits-all answer, and we’d strongly urge you to get proper advice on how to apply the above amendments to your specific circumstances in a tax-efficient manner. With decades of experience in cross border consulting, Sentinel would love to review your situation.
Shaun Eastman [Bcom(Law), LLB, LLM(Tax Law)]
Trust Executive / Cross-Border Tax Specialist