Demystifying the Cease Tax Residency Process - Back to Basics
South African expatriates are often faced with a challenging decision – whether or not to cease their tax residency in South Africa (SA). However, this process has evolved drastically over the last few years, causing confusion for expatriates and tax professionals alike. Many remain unaware of what ceasing their tax residency in SA means and what it actually entails, making an already complex process even more challenging to navigate.
Khutso Makgoka
Legal Consultant: Expatriate Tax
Martin Bezuidenhout
Technical Lead: Expatriate Tax
In light of these various changes, understanding the process of ceasing tax residency, from its basic tenets, is key. This remains especially the case where one refers to financial emigration.
Financial emigration involves the implementation of a robust strategy to ensure that the individual makes a clean and optimal fiscal break from SA (of which ceasing their tax residency is a part).
Unpacking the Basics
The process of ceasing one’s tax residency in SA refers to the process of formalizing one’s non-resident tax status with the South African Revenue Service (SARS) by confirming that one should no longer be taxed in SA on amounts that do not arise from a source in SA.
Financial emigration, on the other hand, involves ceasing tax residency in SA and concerns the winding down of one’s financial affairs in SA to enable the migration of their wealth offshore.
There are no technical terms or proper catch-all phases for these processes, and different practitioners will use different terms – it simply speaks to the tax and exchange control compliance of an expatriate.
To be clear, none of this relates to citizenship, and ceasing tax residency (or financially emigrating) does not mean that you are deregistering your tax number.
The Complicated Changes
In March 2021, the South African Reserve Bank (SARB) relinquished full oversight of the emigration process to SARS. This ultimately led to the introduction of the Notice of Non-Resident Tax Status letter, as well as the removal of the separate SARB emigration processes, and the introduction of the 3-year lock-in rule in respect of the encashment of retirement funds.
A key change, however, was the introduction of the Approval for International Transfer Process (AIT) Tax Compliance Status (TCS) Pin, on 24 April 2023. The AIT TCS pin consolidated the “Emigration” TCS and “Foreign Investment Allowance” TCS Pins that were previously issued by SARS, and it clearly differentiated between SA tax residents and tax non-residents.
Additionally, the new AIT process highlighted the importance of the Notice of Non-Resident Tax Status and compliance with all SARS requirements.
Simply, these changes caused a paradigm shift in how one must plan their exit from South Africa, from a tax perspective, and a need to fully understand the implications of tax residency.
Planning Your Financial Emigration Journey
Ceasing tax residency
One of the first steps in financially emigrating is proving to SARS one’s intention to move abroad on a permanent basis. This involves the two “tests” for determining whether the taxpayer should be seen as a tax resident or not. First, SARS will apply the “ordinarily resident” test, which considers one’s intention to live abroad permanently (in view of objective factors that indicate their intention). Only where a taxpayer is already confirmed by SARS to be a non-resident, does the second “physical presence” test apply, looking at the time that the taxpayer spends in South Africa – this is generally not immediately relevant, despite common misconceptions to the contrary.
It is important to understand that time spent abroad is not considered when determining if the individual is no longer “ordinarily resident” in SA and the burden of proof remains with the taxpayer to prove their status (i.e., their permanent intention to live abroad).
Additionally, as SARS, SARB and the National Treasury have cracked down on compliance in recent years, the astute tax advisor should ensure the applicant is compliant before undergoing any process of ceasing tax residency (or delving further into a financial emigration strategy).
Exchange control regulations
The next step would be to determine whether one seeks to maintain their South African bank account after they have emigrated and ceased their tax residency.
While SARB no longer oversees the financial emigration process, it is still heavily involved in regulating South African bank accounts and the remittance of funds and clearly differentiates between individuals who are tax residents and those who have ceased to be tax residents (i.e., non-residents).
Simply put, SA tax non-residents who maintain South African bank accounts are required to convert their resident accounts to non-resident accounts. If not, they may find themselves being labelled non-compliant with SARB regulations and with the consequences that naturally flow from this.
This does not mean that closure of the bank accounts is necessary, as is commonly misunderstood – in fact, it further leaves the door open for continued investment in South Africa (non-residents are not precluded from investing in South Africa). However, there may be restrictions on the functionality of non-resident accounts.
Non-residents, who have ceased their tax residency in South Africa, are required to apply to SARS for approval in respect of the remittance of all capital funds, from cent 1, abroad using the AIT TCS Pin. This applies in all cases, subject to certain exceptions.
Encashment of retirement savings
Once the taxpayer has ceased their tax residency in South Africa, and obtained an AIT TCS Pin, they can potentially begin the process of encashing their retirement savings. However, due to the implementation of the 3-year lock-in rule in 2021, this has become a lengthy process.
Previously, individuals ceasing tax residency in SA (i.e., undergoing the financial emigration process) could withdraw their retirement funds, in full, immediately upon the formalisation of their residency cessation. Now, one must be a non-resident for a minimum of 3 years, as confirmed by SARS, before one can withdraw their retirement benefits in full (subject to lump sum tax implications).
Sharpen the Saw: Strategy is Often Critical
Ceasing tax residency and, indeed, financially emigrating remains nuanced and has become slightly more complex with all of the recent changes seen to date. It remains essential, now more than ever, that one’s exit from SA is done strategically, considering the potential implications around exit tax, withdrawal of one’s retirement fund interests and the remittance of funds to ensure tax compliance and optimisation when shifting their wealth offshore.
To ensure an optimal exit is achieved, it is advisable to approach a service provider who can assist with all of these critical components. If you are not advised on all of it, then it is time to ask the right questions.