As of 1 March 2020, an amendment to the South African Income Tax Act will have definite ramifications on the lives of South Africans living and working abroad.
Now that this infamous ‘expat tax’ is in effect, SA expats are now obligated to pay up to 45% of their foreign income to the taxman when it exceeds R1 million per annum, which includes any fringe benefits provided as part of the job.
But what about investors? How does ‘expat tax’ change your investment strategy and how should you approach offshore earnings being taxed from an investment perspective?
Please remember that the following does not constitute financial advice.
Offshore investments and the expat tax
First, the somewhat good news: investment income is still considered passive income and, if you are residing in South Africa and a citizen but have offshore investments, dividends and the like will be taxed just as they always have been and not under the new ‘expat tax’. Same goes for rental property owned overseas, shareholder earnings and so on. As long as it’s passive, you should be fine.
Active income and expat tax
But what if you do work overseas, at least some of the time? Even for those with stable and reliable employment, maintaining one’s life in a second city can be costly.
In this situation, your choices are frustratingly few. You can either return to SA, find an offshore structure in which to invest those earnings, or formalise the process of financial emigration. Each of these options comes with significant consequences.
For many expats, particularly those who have lived elsewhere for an extended period and thereby assimilated into the culture of their host nation, the idea of returning to South Africa and all its social and political instability is not a welcome one.
If you are a skilled professional with good standing in the other country, the concept of financial emigration may best suit your needs. At a very basic level, this is making the official decision to sever your connection with South Africa and surrender your status as an ordinary resident. Beware though, because doing so will impose strict limitations on what you can do with locally remaining assets, impede your ability to acquire more in the future, as well as having serious implications on capital gains tax. Furthermore, depending on how and when you choose to relinquish citizenship, your actions may be assessed with a distrustful attitude. Especially now, after 1 March.
Two of the main reasons for choosing this route are if you are certain you have no intention of returning to South Africa, or if you stand to receive a substantial inheritance in the years ahead – R10 million or more. Once you’re no longer an ordinary resident, any inheritance should potentially be paid to you directly in the foreign jurisdiction, without the need for approval from the South African Reserve Bank or clearance from the South African Revenue Service, both of which apply to South African citizens.
Other ways to protect your foreign earnings would be to establish a formally recognised company in a tax-friendly location, through which to invoice your employer, though taking such a path would mean you’ll need to pay very close attention to the specific conditions and requirements, in order to comply with international law.
Finally, it could be an option to put those earnings into an offshore investment platform somewhere the tax codes aren’t so harsh, thereby limiting your exposure to penalties and estate duty. Whichever option you pick, none will be particularly easy or stress-free, but decisions must be made to ensure you have legally compliant structures in place to protect your current lifestyle and future prospects.
Ultimately, the laws surrounding taxation are a quagmire at the best of times, and become infinitely more complex when different countries’ laws are at play simultaneously.
The ‘expat tax’ situation highlights the need for sound professional financial advice within a good understanding of South African offshore investment vehicles, fiduciary laws of the countries in which you earn and what your particular financial goals and needs are.