South Africa’s so-called ‘Expat Tax’ comes into effect on March 1, 2020 – and if you’re a South African working abroad who is still a tax resident in this country, listen up. It’s going to be a game-changer for your finances.
In effect, the amendments to the Income Tax Act mean that South Africans working overseas will now only be exempt from paying tax on the first R1-million they earn elsewhere. The rest of their earnings – including all fringe benefits, like housing, education and flight allowances – will now be taxed according to the normal tax tables for the year, which can go up to 45% in some cases.
The impact will be particularly severe for the thousands of South Africans currently living and working in tax-free geographies, like most countries in the Middle East.
Richard Neal, Managing Director of Sovereign Trust (SA) Limited is available to speak on the below 3 options for South Africans earning an income abroad, discussing the various verdicts, and how to best navigate them.
Moving back to South Africa
Apparently, some South Africans are considering this option, as the new tax law regime will make it difficult to maintain their lifestyles abroad while continuing to honour local commitments. Verdict: it’s not really an option for most people, who left for better opportunities, and may struggle to find a job in a tough economy.
Financial emigration is the formal process of changing your tax status with the SA Revenue Service (SARS) and the SA Reserve Bank (SARB) from ‘resident’ to ‘non-resident’. But beware: it’s not a as simple, or cheap, as you think.
If you decide to financially emigrate, you will have to pay capital gains tax on your local assets, and impose restrictions on assets remaining and that you might want to acquire in SA. Also, if you come back after 5 or 10 years, your actions will be viewed with some suspicion.
Set up tax-efficient structures
If emigration or financial emigration isn’t an option, you could consider setting up a structure to limit your liability and protect your foreign income and assets: for example, setting up an offshore professional services company in a tax-friendly jurisdiction that could then invoice an international employer. However, this would have to take into account the new substance requirements introduced in most of the offshore jurisdictions.
Another option to consider would be an investment portfolio housed within an International Retirement Plan, like Guernsey 40ee, especially if retirement contributions fall into the threshold. This will minimise your tax exposure, as plans like this are exempt from capital gains tax on the initial capital invested, there is no tax on interest earned, and there is potentially no estate duty, which makes it an efficient succession planning mechanism.