The 2020 National Budget included a number of tax proposals which can be seen as a ‘last-ditch attempt’ by the government to stop people leaving South Africa.

This is the view of Jonty Leon and Jean du Toit of Tax Consulting SA who said that some of the biggest new proposals focus on the incoming ‘expat tax’ and financial emigration.

Set to come into effect from 1 March, the expat tax will mean that South African tax residents working internationally will only be exempt from paying tax on the first R1.25 million they earn abroad. Thereafter they will be required to pay tax on any foreign earnings.

Previously this cap was set to R1 million.

“Some advisors have recommended emigration, as recognised by the Reserve Bank, as a way to break tax residency,” the Budget document reads.

“However, this is only one factor considered by SARS. Government wants to encourage all South Africans working abroad to maintain their ties to the country.”

This can be seen as a desperate attempt to change the mind of those South African’s formalising their non-resident status by increasing the exemption cap to R1.25 million. This is of course welcome, but a little too late, said Tax Consulting SA.

“The increase will unfortunately assist with only a small group of South Africans working abroad, and merely dangles a carrot for the rest of those abroad to entice them to remain within the South African tax net.

“The big issue which has been raised on numerous occasions with government is the issue of fringe benefits, which in many cases depletes the exemption before one even considers the cash component of their salary to be taxed.”

Financial emigration

Government has also taken notice of the massive increase in South Africans ceasing residency through financial emigration to avoid the change in legislation, Tax Consulting SA said.

The current loss of revenue and potential future loss with South Africans continuing to cease residency means that the expat tax has backfired before it has even become effective, the group said.

“Government has announced that they will remove some of the emigration formalities from an exchange control perspective, which will take effect from 1 March 2021.

“These exchange control formalities will be replaced with an uncertain future regime which leaves South Africans with 12 months of some semblance of certainty and to get their affairs in order before a new regime is put in place.”

The Budget specifically mentions that ‘government wants to encourage all South Africans working abroad to maintain their ties to the country’.

“This must be viewed with some skepticism as government asking a taxpayer to keep ties with the country, and knowing how South African tax residency works, would lead to an attempt to keep the taxpayer within the tax net, while still defending the punitive expat tax,” Tax Consulting SA said.

“Government has confirmed that tax residency will still be determined as per South African case law and legislation, being the ordinarily resident test and physical presence test – this comes as no surprise, but does show that government understands that it needs to hold on to its South Africans abroad to ease a flailing tax base,” it said.

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