Financial Emigration: Should you make the move?

Financial emigration is a complex business, with many unexpected costs as one severs ties with South Africa.

Many people don’t officially emigrate, finding it easier to slowly liquidate assets and shift funds offshore. Here are pointers on what to think about as you weigh up whether you should sell property and cash in long-term savings.

Whenever uncertainty increases, South Africans start looking at how liquid they are if they want to get up and go, and this is one of those times. Noises from the government recently indicate that that they want to ‘document’ emigration to prevent it!

Emigration of educated young persons has been happening for decades, and because they have very little in the way of assets they do not have to ‘financially emigrate’. Those statistics are ‘hidden’ and become part of the brain drain because those young persons just cannot find the jobs they want in South Africa.

For older and more established South Africans though, emigration – as opposed to a leave of absence to work outside the country – comes with a myriad investment or disinvestment decisions that need to be made. This is what we mean by official or financial emigration.

Capital gains tax

One factor many emigrants do not consider is that emigration triggers Capital Gains Tax (CGT), whether or not one leaves one’s investment or property here. If one merely works elsewhere but remains a South African resident (as many people do if they work in Dubai for example) then this does not apply.

Be aware though that the government is itching to bring those ‘tax-free’ earnings into the RSA tax net. Capital Gains Tax was initially introduced to replace Estate Duty, but I am sure it is of no surprise that not only do we have both but that CGT is creeping steadily upwards and is now a nasty corroder of any investment. Have a look at the maximum rate increase over the last few years. (The assumption used here is that you are taxed at the top tax bracket of 40+%)

If you’re thinking of financial emigration, and if you have a large property or stock portfolio, we recommend you make yourself familiar with CGT.

You can get a simple 15-page brochure on it here.

If you are an insomniac, there the 800+ page brochure available too!

Working out CGT is not simple and is a multi-step calculation, as you will discover if you read the brochure, so I recommend you get your accountant, tax advisor or qualified Financial Planner to do this for you.

There are two aspects to capital gains:

• the ‘inclusion rate’ (the percentage of the capital gain that is used in the calculation), and
• your marginal tax rate.

Flexible investments

These are relatively easy to deal with, as either:

• one leaves them, or
• one sells out and use one’s Forex allowance to take the proceed out.

Either way one will have to pay Capital Gains Tax on shares or unit trusts. If one leaves it here, one will have to keep submitting returns and paying tax, but if you move to a country that has a tax agreement with RSA, then the tax paid here will be a credit on the other side so double tax is not paid.

Pension and Provident Preservation Funds

These are put in place (with the help of a financial advisor) in order to preserve the tax status. If you withdraw from that fund (one withdrawal before retirement (age 55) is allowed – it can be the full amount) but is taxed according to lump sum withdrawal tables.

A R25,000 lifetime tax free amount is allowed. Thereafter, a sliding scale starting at 18% and going up to 36% applies

If one officially emigrates, Pension Preservers can also be left and handled at retirement or age 55 – but that involves substantial administrative PT, especially if one does not have an RSA bank account.

With the above in mind and, if one chooses to go this route, we suggest that Clients keep (even basic) RSA bank account in place.

Depending on the size of the preserver, tax could take a sizable chunk out of your investment. Should your personal circumstances permit, one has the option of never retiring from it, in which case it will go into your estate.

Retirement Annuities

Prior to March 2016 it was not possible for one to take a lump sum from an RA on emigration. Since March 2016 a Retirement Annuity is treated in the same way as Preservation Funds, but one does have to prove that one is formally or financially emigrating.

The above is not the case with Preservation Funds.

Retirement annuities are treated as a pre-retirement lump sum withdrawal and taxed accordingly and your financial advisor will be able to work out the exact tax impact.

If you are over the age of 55 it might make more sense to ‘retire from’ the fund, take the R500,000 tax free life time amount and have the compulsory annuity pay out at the full 17.5% of the investment, once a year.

The capital amount left will probably be depleted in 7 years or so and you will need to keep a local bank account to accept those funds.

Retirement Annuities effected on an insurance platform (as opposed to LISP) may give rise to some nasty termination penalties over and above this.

Neither Retirement Annuities nor Pension or Provident Preservation Funds can be ‘transferred’ offshore and keep their tax status.

Financial Emigration: Should one make the move?

The forex allowances are currently quite generous even if one does not emigrate. If you wish to see all the small print, then go here.

In summary:

• you can invest R10m offshore every year, in addition to
• R1m ‘single discretionary allowance’

Once you have been out of the country for 181 days then the income you have earned is currently not taxed in the RSA although this “concession” could evaporate if SARS has its way!

Considering:

• the potential CGT tax bill especially if one has a property or share portfolio which one plans to keep,
• the tax payable on lump sum withdrawals, and
• the possible penalties on the premature termination of Retirement Annuities

It might not make sense to officially emigrate

Whatever option you elect, you do not have to give up your South African citizenship unless:

• it is required by your adopted country should you become a citizen there as not every country allows dual citizenship.

What do we suggest? 

We recommend that you have a comprehensive financial plan done, by a professional, looking at the financial impact of officially emigrating or not.

The fee for this will probably run from about R15 to +R50k depending on how complicated your affairs are.

Whether or not you are thinking of emigrating, the sooner you can determine the ‘base cost’ of your properties the better (especially if pre-1/10/2001).

All your good record keeping of all capital expenses incurred on properties will stand you in good stead in legitimately massaging down the CGT bill when the time comes!