In the recent Budget, mention was made that the concept of emigration as we know it would disappear.
There is a lot of fear that the government wants to put more restrictions on residents but the proposed changes are suggested to get South Africa more in line with other countries and to remove some of the regulations with Exchange Control. This will make it more inviting to international Investors as it will pose less red tape and it will also result in SA residents and emigrants from SA being treated similarly when engaging in cross-border transactions. Therefore the process for both will be identical and the limits imposed will be universal.
There is also a lot of people that want to emigrate immediately because they heard of the 3 year waiting period on Retirement Annuities. Hopefully the following will give clarity on withdrawal of Retirement Annuities.
It is important to note it is only proposed changes. At this stage it is only a first draft proposal and is open for comment.
Currently, the Income Tax Act (ITA) defines retirement annuities (RA) and preservation funds to allow full access if a member has formally emigrated (no 3 year waiting period). Therefore, where a member of a fund has formally emigrated by following the process as prescribed by the SARB, that member will be entitled to make a full withdrawal from the RA or preservation fund. This withdrawal will be taxed in terms of the withdrawal tax table and the after tax amount can be remitted offshore as part of the individual’s emigration allowance.
In the 2020 Budget, it was stated formal emigration will be phased out.
In the past we have often had to distinguish between a resident for exchange control purposes and a resident for tax purposes, as the two definitions would not always result in the same answer. It is expected that the proposed overhaul of the emigration process will remove this discrepancy and result in a situation where tax residency is the only residency status that will be relevant.
The proposed amendment to the definition of an RA and preservation fund determines that a member will be able to make a full withdrawal if that person is not a SA tax resident and that status has remained intact for an uninterrupted 3 year period.
So the obvious question is – when will a person NOT be a SA tax resident? To answer this we have to consider what it takes to be a tax resident.
Definition of a tax resident- In terms of the Income Tax Act, a natural person is resident for income tax purposes if the person:
• Is ordinarily resident in South Africa; if not, the person
• Meets all the requirements of the physical presence test; and
• Is not deemed to be exclusively a resident of another country for the purposes of the application of any tax treaty.
Ordinary Resident test is a facual test and can be wideley interpereted.
But basically comes down to If a person leaves SA with the intention to do so permanently and uproots their entire life and family in the process, it is safe to say that the ordinarily resident test will no longer be met. This does not mean that the person is no longer a SA tax resident – it means that one moves on to the physical presence test.
The physical presence test is based on the amount of time a person is in South Africa during the year of assessment (tax year) and also during preceding tax years. This test is only conducted if the person is not ordinarily resident during that tax year. The requirements refer to the number of days that a person must actually be present in the country during a tax year and also during the five tax years preceding the year under consideration.
Based on this test, a person is a South African tax resident if they are physically present in the country for a period or periods exceeding –
• 91 days in aggregate during the year of assessment under consideration;
• 91 days in aggregate during each of the five years of assessment preceding the year of assessment under consideration; and
• 915 days in aggregate during the five preceding years of assessment.
If a person, who is a resident, is physically outside the country for a continuous period of at least 330 full days immediately after the day on which such person ceases to be physically present, that person’s tax residency is deemed to have ceased on the day that they left the country.
If the person left SA permanently and that person is absent for the full 330 days, then that person ceases to be a tax resident on the day they left the country. This rule can only apply when determining whether a person is tax resident by virtue of physical presence.
At the moment, if a person has formally emigrated that person can access their RA or preservation fund as a pre-retirement withdrawal (full access taxed as a withdrawal).
In the future the emigration process will be easier but with a 3 year waiting period from the date of emigration. No access to the living annuity capital is possible due to the emigration of an annuitant.
Let us know if you have any questions regarding your personal situation
Source: Momentum Legal and Technical Update
PJ Botha CA(SA), CFP ®