South Africans earning an income abroad need to consider their options.
An amendment to the SA Income Tax Act becomes effective in March 2020, and has hard-hitting consequences for South Africans working outside SA. It requires that SA tax residents spending more than 183 days abroad (of which 60 days are consecutive) pay SA tax of up to 45% of their foreign employment income once it exceeds R1m per annum. And, although this threshold may seem generous, employment income for this purpose includes allowances and fringe benefits like the provision of housing, security and fights, among other things. It is also likely that pension contributions will be included in the threshold.
Living in Dubai, for example, is expensive. How do you maintain a standard of living and also pay tax on your foreign income? Bryony Oostingh, Consultant at Sovereign Trust SA, says that you have only a few options:
• Do nothing (which isn’t advisable)
• Move back to SA
• Set up a structure to limit your liability and protect your foreign income and assets
• Financial emigration.
Financial emigration is the formal process of cutting all ties with SA and informing SARS and the SARB that you will no longer be ‘ordinary resident’ here. Formal emigration can impose a lot of restrictions on assets remaining in SA as well as assets that you might want to acquire in SA, and can have significant capital gains tax repercussions.
Oostingh notes that someone who has been an expatriate for a long period and who ‘emigrates’ just before March 2020 must expect their action to be viewed with suspicion. However, it may still be a good option for someone who has been living abroad for the last 15 years, has acquired citizenship abroad, and has no intention of returning to SA. Likewise for someone who expects to inherit more than R10m, as this may enable the inheritance to be paid to them directly rather than having to obtain SARB approval and tax clearance to get the funds offshore using their foreign investment allowance (only R10m per year).
As for creating compliant tax-efficient structures to preserve offshore assets and income, Oostingh recommends an offshore investment portfolio housed in a Sovereign Conservo International Retirement Plan (Guernsey 40ee) – especially if retirement contributions fall into the threshold. “Rather minimise your tax exposure than be completely exposed. The Guernsey-based Conservo is exempt from capital gains tax on the initial capital invested, there is no income tax levied on interest earned and, potentially, no estate duty, which makes it an efficient succession planning mechanism. Another alternative to creating an international retirement plan is to consider setting up a professional services company in a tax-friendly jurisdiction which could invoice an international employer.” However, careful consideration needs to be given to the new substance requirements introduced in most of the offshore jurisdictions.
“Basically,” says Oostingh, “South Africans have less than twelve months to decide whether they will formally emigrate or not, and if not, they need to ensure that they have legally-compliant tax structures in place if they want to maintain the lifestyles they are accustomed to.”
By Bryony Oostingh