Expatriates are often under the impression that they need to wait three years before they can formalise their non-residency status.  This can be due to various reasons such as misunderstanding the legislative amendments, advisors wanting to monetize on the withdrawal of these retirement funds and the subsequent remittance offshore or lack of professional guidance.

3-year lock up rule explained

The misconception is most likely due to the introduction of the 3-year lock up rule, which came into effect from 1 March 2021, and the impact of the introduction hereof has continuously confused expatriates and their advisors. 

Prior to March 2021, individuals who ceased their tax residency and confirmed their emigration status with the South African Reserve Bank could withdraw their retirement interest in South Africa immediately.

With effect from 1 March 2021, these individual’s retirement benefits are locked in for a minimum period of three years, after which they could be fully withdrawn (subject to lump sum tax implications). 

The three year-rule does not imply that, an individual who wishes to withdraw their retirement interest, post-pone their formalisation of non-residency until the three-year period has lapsed. This is a risky approach that should be avoided.

Why waiting may put you at risk

Tax residents of South Africa are taxable on their worldwide income while non-residents are only taxable on their South African sourced income. This means that tax residents should declare their world-wide income to SARS and then claim the specific exemption, if they meet the requirements.

Ceasing your South African tax residency

An individual can cease their South African tax residency either by proving to SARS that they are no longer an ordinarily resident of South Africa or through the application of the Double Taxation Agreement.

Cessation through the application of the ordinarily resident test requires the individual to prove to SARS objectively that they have the intention to permanently reside outside of South Africa. In other words, if you have the intention to reside abroad permanently and the intention can objectively be substantiated, you will break the ordinarily resident test and will qualify to cease your tax residency. This once off process requires documentary evidence that substantiates their intention to reside abroad to meet the qualifying criteria.

To claim DTA relief, certain steps must be taken and with sufficient evidence confirming that you are no longer a tax resident in South Africa being the most important – alongside a foreign tax residency certificate. DTA relief is claimed on an annual basis and is the best option if an individual will remain abroad for a number of years but do not wish to reside abroad permanently.

This process is country-specific; however, South Africa has treaties in place with majority of countries, more importantly, with the most common countries to which taxpayers relocate. It is important for individuals to understand that cessation of their tax residency does not happen automatically, and that the onus is on the taxpayer to prove that they meet the relevant qualifying criteria.

Planning your fiscal exit out of South Africa and remaining compliant as a tax resident

Exiting tax residency may also have financial planning implications, as you may need to restructure your investments or retirement accounts to comply with the tax laws of your new country of residence.

An alternative route to protect your foreign income is applying the foreign employment exemption where the first R 1 250 000 may be exempted if the individual meets the requirements. 

The Risk of Waiting

Individuals who are still noted as a tax resident of South Africa, in other words, who have not formalised their non-residency status, are required to declare their worldwide income to SARS while filing their tax returns in South Africa. Not declaring foreign income as a resident is factually incorrect and will be seen as a non-declaration, which is an offence. 

Further, there might be a risk of double tax exposure, as the foreign employment exemption, which is limited to R 1 250 000, only applies to employment income. Many South Africans living abroad, earn above this threshold and are therefore at risk.

A head in the sand approach is not advisable, and it is very important to ensure you are compliant while residing and working abroad and ensure what you are declaring to SARS is factually correct and aligns with your tax status.

The proof is in the documentation

The South African Revenue Service issues confirmation to a taxpayer once they have met the relevant criteria to be seen as a non-resident. This Notice of Non-resident tax status letter is required by a policy holder, together with ancillary documentation, to process the full withdrawal of an individual’s retirement interest prior to maturity. 

This letter confirms that the individual is noted as a non-resident for tax purposes in South Africa with the exact cessation date noted. This notice makes it possible for expatriates to confirm that they have met the legislative requirement to withdraw their retirement interest.

Conclusion

It's crucial to consult with a qualified tax professional or attorney who specializes in international taxation to avoid any unnecessary non-compliance issues and to assist navigating through the complexities of cross-border taxation.

They can provide guidance tailored to your unique situation and help you navigate the process correctly to avoid any legal or tax issues. Additionally, consider consulting with tax authorities in your home country to understand how ceasing South African tax residency might affect your tax obligations there.

Written by Martin Bezuidenhout, Technical Lead: Expatriate Tax at Tax Consulting SA; and Chavaughn Phillips, Team Lead: Expatriate Tax at Tax Consulting SA