The new rules around citizenship, exchange control and tax residency_ part 2

The new rules around citizenship, exchange control and tax residency: part 2

The concept of “emigration”, as recognised by the Financial Surveillance Department (FSD) of the South African Reserve Bank (SARB), has been phased out with effect from 1 March 2021. This has created even more confusion around citizenship, exchange control (excon) residency and tax residency, and how the changes will affect different individuals and access to retirement funds.

In last week’s Moonstone Investment Indicators, we published the first part of an article by Carla Rossouw, tax lead, and Jaya Leibowitz, senior legal adviser, at Allan Gray, who explain the difference between these three concepts and the impact of each on access to investments. This is the second and final part.

The new “emigration”: ceasing to be a tax resident from 1 March 2021

If you have followed the process to cease to be a South African tax resident, new rules will apply regarding the assets that you can take out of the country.

Once you have obtained the tax compliance status (TCS) PIN and the South African Revenue Service (Sars) has confirmed that you are tax compliant, you will be able to transfer up to R10 million of your assets offshore per year. You will not be entitled to use the annual single discretionary allowance (SDA) that is available to residents.

However, in the year that you cease to be a tax resident, you will be allowed to transfer up to R1m as a travel allowance without obtaining a TCS.

In addition, household and personal effects up to R1m per family unit may be taken out of the country under a Sars “Customs Declaration”, provided these assets have been declared on the relevant forms.

If you want to transfer more than R10m offshore, you will be subject to a more stringent verification process by Sars and will have to apply for approval from the FSD. Before approving these transfers, Sars and the FSD will verify your tax status and the source of funds, and you will be assessed in terms of the anti-money laundering and countering terrorism financing requirements.

Accessing benefits from South African retirement annuity and preservation funds

Before 1 March 2021, Sars allowed individuals who formally emigrated from South Africa to access their retirement annuity (RA) and preservation fund savings prior to reaching retirement. These savings would be paid into the emigrant’s capital account and could then be taken offshore. This process will still apply if you submitted an emigration application before 28 February 2021, and your application is approved by the SARB on or before 28 February 2022.

From 1 March 2021, under the new process, if you have not formally emigrated, you will be able to access your RA or preservation fund benefits only if you have not been a South African tax resident for an uninterrupted period of three years on or after 1 March 2021.

Note that if you have not accessed your pre-retirement withdrawal benefit from your preservation fund, you will have immediate access to your benefit, as has always been the case.

If you leave South Africa when your work or visit visa expires, you will still be able to access your benefits in the same way as before 1 March 2021.

The new cessation of South African residency test from 1 March 2021

The new “three-year” test provides for the payment of lump-sum benefits when:

  • A member ceases to be a South African tax resident (as defined in the Income Tax Act); and
  • Remains/has remained a non-tax resident for three consecutive years or longer on or after 1 March 2021. The three-year period can start before 1 March 2021, meaning that if on 1 March 2021 you already met the requirements and were not a South African tax resident for a period, you do not need to start counting the three years again from 1 March 2021.

The table summarises how your RA and preservation fund benefits can be accessed after 1 March 2021.

Accessing retirement fund benefits* at cessation of South African tax residency
Limited retention of old dispensation The member is or was a South African tax resident who emigrated from South Africa, and that emigration is recognised by the SARB for purposes of exchange control, where the emigration application was received on or before 28 February 2021 and is approved on or before 28 February 2022.
New test The member has ceased to be a South African tax resident and has remained a non-tax resident for an uninterrupted period of three years or longer on or after 1 March 2021.
Source: SARS, Allan Gray
*Preservation fund members can still make a once-off withdrawal before retirement if they have not already done so.

Why the emphasis on a three-year period?

The three-year requirement was the subject of much debate and consultation between industry and National Treasury. The SARB’s rationale for phasing out emigration was to make it easier to take money out of the country and to discourage people from cutting ties with South Africa. The three-year requirement adds a degree of permanency to a relocation abroad (in other words, it discourages those leaving South Africa for a short amount of time from withdrawing their retirement savings).

Ceasing to be a South African tax resident has a much lower compliance burden than the previous requirement to emigrate financially, which involved a lot of administration and time. National Treasury’s intention is to make it less burdensome for South Africans to access their retirement benefits on leaving the country.

How will the new test work in practice?

The industry has been working with Sars to formulate a suggested list of documentary evidence to substantiate that an individual (1) has ceased to be a South African tax resident and (2) has remained a non-tax resident for three consecutive years or longer.

Seek advice

Determining your residency for tax or excon purposes can become complicated and depends on your unique circumstances. We recommend that you seek advice from a South African tax or exchange control specialist if you are leaving or have left South Africa to live abroad, whether on a temporary or permanent basis.

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