How to Leave the South African Tax System: Financial Emigration Guide

Leaving the South African tax system involves two parallel processes that are frequently confused: ceasing tax residency with the South African Revenue Service (SARS) and completing financial emigration through the South African Reserve Bank (SARB). Both are necessary for a clean departure, and each carries its own obligations, costs, and timing requirements.

South African Tax Residency

South Africa determines tax residency through two tests:

The Ordinarily Resident Test

An individual who is ordinarily resident in South Africa is tax resident. "Ordinarily resident" is interpreted as the country to which the individual would naturally and as a matter of course return from their travels -- their normal or real home.

The leading case (Cohen v CIR, 1946) established that ordinary residence is determined by the individual's habitual and normal place of abode, their settled routine, and their intention.

The Physical Presence Test

An individual who is not ordinarily resident in South Africa is still tax resident if they meet all three conditions:

• Present in South Africa for more than 91 days in the current year of assessment (1 March to 28/29 February)
• Present in South Africa for more than 91 days in each of the preceding 5 years of assessment
• Present in South Africa for more than 915 days in aggregate during those preceding 5 years

Both tests operate independently. Meeting either one creates South African tax residency.

Ceasing Tax Residency: The CGT Consequences

When an individual ceases South African tax residency, Section 9H of the Income Tax Act deems a disposal of all worldwide assets (with specific exclusions) at market value on the date of cessation.

The Deemed Disposal

Assets caught:

• Listed and unlisted shares
• Cryptocurrency
• Foreign real estate
• Foreign bank accounts and investments
• Partnership interests
• Trust interests
• Intellectual property

Assets excluded:

• South African immovable property (remains subject to South African CGT on actual disposal)
• Assets attributable to a South African permanent establishment
• Any asset that remains subject to South African CGT for non-residents

CGT Rates

South Africa applies an inclusion rate to capital gains, which is then taxed at the marginal income tax rate:

• Individuals: 40% inclusion rate x 45% top marginal rate = 18% maximum effective CGT rate
• Annual exclusion: ZAR 40,000 per year
• Primary residence exclusion: Up to ZAR 2,000,000 on gain from disposal of primary residence

For an individual with ZAR 10 million in unrealised gains, the CGT charge on departure would be approximately ZAR 1,800,000 (18% of ZAR 10 million, less the annual exclusion).

Financial Emigration Through SARB

South Africa's exchange control regulations, administered by SARB through authorised dealers (commercial banks), restrict the cross-border transfer of funds. Financial emigration is the formal process by which an individual changes their exchange control status from "resident" to "emigrant."

The 2021 Reforms

In 2021, SARB replaced the formal financial emigration process with a new framework:

• The concept of "emigrant" was replaced with "individual who has ceased to be a South African tax resident"
• The process now centres on obtaining a Tax Compliance Status (TCS) PIN from SARS confirming cessation of tax residency
• The TCS PIN is then presented to the authorised dealer to facilitate the transfer of funds

Steps in the Process

1. Cease tax residency with SARS -- Submit the declaration of cessation of tax residency through SARS eFiling or at a SARS branch. SARS will assess whether the individual has genuinely ceased to be ordinarily resident.

2. Settle all outstanding tax liabilities -- Including the CGT charge on the deemed disposal under Section 9H.

3. Obtain a TCS PIN for emigration -- Apply through SARS eFiling for a Tax Compliance Status PIN specifically for emigration purposes. SARS will conduct an assessment that typically takes 21-60 business days.

4. Present TCS PIN to authorised dealer -- The commercial bank (typically FNB, Standard Bank, Nedbank, or ABSA) will process the exchange control approval for the transfer of funds.

5. Transfer funds -- Once approved, there is no limit on the amount that can be transferred, but transfers exceeding ZAR 10 million per calendar year require additional motivation and documentation.

Common Delays and Complications

• Outstanding tax returns: SARS will not issue a TCS PIN if any tax returns are outstanding, including provisional tax returns, income tax returns, and VAT returns.
• Ongoing SARS audits: If SARS has an active audit or verification on the individual, the TCS process is paused until the audit is resolved.
• Trust beneficiaries: If the individual is a beneficiary of a South African trust, SARS may request additional information about distributions and the trust's tax compliance.
• Retirement fund withdrawals: Retirement annuity funds and preservation funds can only be withdrawn in full once the TCS PIN is issued confirming emigration. A withholding tax applies on lump sum withdrawals.

Retirement Funds

South African retirement funds are subject to specific rules on emigration:

Retirement Annuity (RA) and Preservation Funds

• Can be withdrawn as a lump sum after emigration
• Subject to a withdrawal tax (not CGT) calculated on a sliding scale:
  • First ZAR 550,000: 0%
  • ZAR 550,001 - ZAR 770,000: 18%
  • ZAR 770,001 - ZAR 1,155,000: 27%
  • Exceeding ZAR 1,155,000: 36%
• Previous withdrawals and transfers reduce the available thresholds
• A 3-year waiting period from the date of emigration applies before withdrawal (introduced in 2021)

Pension and Provident Funds

• If still employed by the sponsoring employer, withdrawal is not permitted until cessation of employment
• On cessation of employment, the same withdrawal tax scale applies

Double Tax Agreements

South Africa has over 80 DTAs. Key treaty provisions for departing residents:

• Article 4 tie-breaker: Permanent home, centre of vital interests, habitual abode, nationality
• Article 13 (Capital Gains): Most South African DTAs preserve South Africa's right to tax gains on immovable property. Gains on other assets are generally taxable only in the country of residence.
• Article 18 (Pensions): Many South African DTAs allocate pension taxing rights to the source country, meaning South African pensions may remain subject to South African tax even after departure.

The Rand and Transfer Considerations

Exchange control implications extend to the practical transfer of wealth:

• Single discretionary allowance: ZAR 1 million per calendar year (no TCS PIN required)
• Foreign investment allowance: ZAR 10 million per calendar year (requires TCS PIN)
• Emigration transfer: No statutory limit, but amounts above ZAR 10 million require additional documentation and motivation

South African banks typically charge 0.5-1.5% for foreign exchange conversion on large transfers. Timing the transfer relative to ZAR exchange rate movements can have a material impact on the USD or EUR equivalent received.

Key Takeaways

• Ceasing South African tax residency triggers a deemed disposal of worldwide assets (excluding SA property) at an effective CGT rate of up to 18%.
• Financial emigration through SARB requires a Tax Compliance Status PIN from SARS, which can take 21-60 business days and requires all tax affairs to be current.
• Retirement fund withdrawals after emigration are subject to a 3-year waiting period and a withdrawal tax of up to 36%.
• The exchange control regime requires careful management of fund transfers, particularly for amounts exceeding ZAR 10 million.
• South Africa's DTA network generally preserves the right to tax South African real property gains and may preserve pension taxing rights.
• The process should begin 6-12 months before the intended departure date to allow for SARS processing times and resolution of any outstanding issues.