Carlie: Hey there it’s Carlie with the Expat Focus podcast. We’re homing in on tax issues for South African expats in this episode because, did you know they’re on track to beat their own emigration record this year?
And the biggest mistake expats can make, according to today’s guest, is thinking they’re not a big enough fish for the South African Revenue Office to bother coming after. Sadly, you won’t just disappear off their radar once you do leave the country.
Attorney and financial emigration legal specialist Jonty Leon is going to explain why sorting out your South African tax situation is just as important as deciding what comes with you when you do make the move. To start, can you paint a picture for me when it comes to South African expats and their tax obligations?
Jonty: Well Carlie, it’s a (laughs), it’s a complicated one. There seems to be a division going three ways that I’ve noticed at least with the work that I’ve been doing, and the first division being the defiant expats who refuse to acknowledge that they have any responsibility that has been created by law towards the South African Revenue Service.
Then we’ve got the second group, and those are those expats that are adopting a wait-and-see approach. So they’re not defiant per se, but would rather wait and see what happens to other expats, and once they see what happens they then decide they’ll act. The problem with sort of taking this stance is that when you do act you’re in a bad position, you’re acting in defence instead of on the offence, and that makes things a lot more complicated down the line.
And then we’ve got the third group, being those expats that have decided to ensure that they’re fully compliant, and they’re protected in terms of the law, by going through all of the formalities of emigrating from South Africa.
Carlie: What do you think it is that puts expats in the first and second group, Jonty? Are they deliberately wanting to fly under the radar, or do they just find this whole thing too hard and don’t want to bother with it?
Jonty: (laughs) I think you’ve hit the nail on the head for both of those. On the one side we’ve got SA expats that are completely fed up with South Africa, they’ve left the country and they do not want to have anything to do with South Africa any more. And they think that there is no obligation on them, and as well even if they do know that there’s an obligation, they think they can get away with it, that SARS won’t find them because they’re in another country, how on earth would SARS, you know, figure this out and come after them?
And then the other expats, it’s just generally that they don’t know that there are these laws in place, or if they do know it can be quite a complicated process, and quite a time-consuming one, and they aren’t able to do it themselves so they, you know, they have to find a professional company to try and assist them with this, and there aren’t many of those companies out there doing, you know, the service of making sure that you have a [unclear word 00:03:07] and emigrated and followed the law and all the procedures that have been put in place.
Carlie: What are your obligations, if you are a South African that has emigrated, back home in South Africa? What is there left to tie up?
Jonty: (laughs) Yeah, that’s, I think that is one of the main questions that South African expats actually have. And that is, it’s a complicated one because you need to cease your tax residency in South Africa once you leave South Africa, if you want to, to stop worrying about being taxed, especially on your foreign income.
And there are two main tests with this, being the Ordinarily Resident test, and the Physical Presence test, these tests are both set out in our, our tax law in South Africa. The main one would be the Ordinarily Resident test, well this in my opinion is the main one.
And that’s made up of two requirements, and the first requirement is an intention to be ordinarily resident in a country, and then the second requirement, there must be steps indicative of that intention, being carried out, or have been carried out.
And with this, we’ve got the issue of South Africans thinking that once they’ve left everything is, is fine and they don’t need to worry about South Africa any more, but in reality they haven’t ceased their tax residency, and there are a number of ways to do that, so specifically with those steps in the Ordinarily Resident test to, to show that you are not a South African resident, that’s like having property in South Africa, family in South Africa, working in South Africa, not having followed the formal emigration procedure to stop being a tax resident in South Africa.
If you haven’t done those things, it shows that your intention is probably not to be non-resident in South Africa, and then you would still need to pay taxes, especially on your foreign income. And South Africans don’t know that once you’ve left South Africa, there is still this tax obligation on your foreign income where you would need to declare your foreign income to the South African Revenue Services every year, and if you fit other tax requirements in South Africa, you can then exempt that income from being taxed.
But South Africans don’t know, and they therefore don’t submit their taxes or declare their income. And then we end up with, you know, major problems. What we find often is that clients come to us and they haven’t been submitting taxes, or didn’t know they needed to, for the past 10 years, and they’ve been out of South Africa for 10 years, and we have to then sort of clean up the mess that has been left behind from them not knowing exactly what they should be doing.
Carlie: And what sort of mess can result, if you’ve neglected to report your earnings back to South Africa for, say, a decade, because I imagine it’s an easy thing to do, once you go abroad you think that’s it, you’re not there, you’ve got no obligation. In reality, what mess could you end up with?
Jonty: Alright, so, the most standard mess or issue that we come across is that you haven’t submitted your tax returns, and you can then get penalties for not submitting that. And that’s sort of on the lower end things.
Penalties can range from something very small to massive amounts of money that accrue interest every single month and end up, you know, snowballing and turning into a huge sort of debt that you then need to pay to SARS, and to try and get out of that is a whole ‘nother story, having to get tax attorneys in to fight your battles, to try and not have to pay that.
Then we go to sort of the other end of the spectrum where South Africans don’t file their tax returns on purpose, or they file them but they don’t disclose all of their income. And that can very quickly look like you are trying to evade tax. And with tax evasion comes massive, massive problems, because that’s a criminal offence, and SARS could then proceed to charge you criminally, and you could end up with, you know, a prison sentence or, or just a fine, but you know, on that side of it it can become very serious very quickly.
Carlie: I guess there’s this difference between somebody that leaves South Africa and still has a home in South Africa, might have investments, might keep money in a bank account, and somebody who leaves South Africa without much behind. Who is SARS more likely to chase? (laughs) And why, and why, I mean we, we said, you know, a lot of people think they’re just not a big enough catch for the Revenue Office. If I have just left, I don’t have a house back in South Africa, I’ve taken all my money with me, I don’t have shares anywhere, surely SARS won’t be interested in me. Is that a, a realistic kind of assumption?
Jonty: I think it is a very common assumption, but it’s not realistic unfortunately. And the reason for that is we now have a system in the world called the Common Reporting Standard, and SARS is part of this, and South Africa’s part of this. And the Common Reporting Standard means that banking institutions globally are feeding information on your income that is going into your bank accounts all over the world, no matter where you are in the world, they’re feeding that information back to SARS.
So SARS knows when you are declaring a certain amount of income, but actually they can see in your bank account that you’ve been earning far more than that. And I think with SARS being able to get all of this information, it’s not a question of if SARS finds me, it’s more of a question of when SARS finds me. And I think there’s a lot of misconception because, you know, in media you often see the big shots getting caught out by tax authorities. And you think, well, you know, it’s them not me, they’re the big shots, they make a lot of money, they won’t come after me, but the reality is, you know, they’ll start with the big ones because those are the easy ones. And then they’ll start moving onto smaller fish if you’ll call it that.
And I’ve actually had some clients receiving letters from their banking institutions in the UK, the UAE, various different countries all over the world, saying that they have been contacted by CRS, and they want certain information for instance. And by the time that happens, you should be very very worried! Because that means you are on their radar, but not just on their radar, they are now proceeding to try and get all the information they need so that they can tax you correctly and enforce the tax that they calculate as your liability. If you manage to somehow hide from SARS, then, you know, you get a smaller bill.
Unfortunately, as I said, they will find you in the end. The other way to look at it is, yes, if you go and declare your income to SARS, especially if we look at the new tax law in South Africa that comes into effect on the 1st of March 2020, which is in regard to South African expats, the law basically states that once you, if you earn a million rand, you can still be exempt from paying tax.
But anything over a million rand, which many South African expats are earning, and that takes into account not just your salary, but also all of the other benefits you get from the company, for instance security, or rental for a house or an apartment. Perhaps they pay for your child’s school fees, something like that. That all gets thrown into the same net of this million rand exemption. So that million rand gets eaten up very quickly, and past that million rand cap, everything you earn above that, you could be taxed up to 45% of that, so South African expats are, you know, in a bit of a flurry at the moment because of this. Taking such a huge chunk of their income could be devastating, and could end up with them not being able to afford to live overseas any more.
Carlie: So in light of all of this, Jonty, obviously the best thing for a South African to do when they’re emigrating is to go about tying up their tax obligation the right way. So how would you begin that process, and what would be the best steps to take?
Jonty: Alright. So, this is a quite a nice simple one, and I hope that the listeners will really heed this call to please, please formalise your emigration. You know, whether you hate South Africa at this point, many South Africans say that once they’ve gone abroad. Or you just sort of don’t know what to do. Find a company that can financially emigrate you. That’s the term we use for the formal process of, of emigrating. And what happens is you have an application to the South African Reserve Bank to request that you become a non-tax resident.
You then obtain an emigration tax clearance certificate from SARS which is immensely important because once you’ve got that you’re noted on SARS’s system as a non-tax resident. Therefore you do not need to declare your foreign income to SARS any more. You would only then declare income in South Africa if you had any, for instance if you had a property in South Africa and you were renting it out, and you’re receiving rental every year, then you would need to be declaring that to SARS. Otherwise, you don’t need to declare anything to SARS in terms of income if you don’t have South African income.
Once you’ve got that emigration tax clearance certificate, the next step would be to do an application to the South African Reserve Bank, which then also puts you on their system as a non-tax resident. Once you’ve done that you are completely compliant, completely safe from SARS, you’ve cut ties with SARS, or with South Africa from a tax perspective, very cleanly, and you then therefore don’t need to worry about these problems of SARS coming after you, or anything else like that. Many South Africans think once you’ve financially emigrated, it means you have cut ties with South Africa broadly, which is completely incorrect. With the process of financial emigration, you are merely cutting ties from a tax perspective. You are still a citizen of South Africa, you can still have your South African passport, you can still have assets and family and a whole bunch of things in South Africa, you can basically keep your life the same, you’ve just now gone through the formal process to make sure that you’re a non-tax resident of South Africa.
Carlie: It really sounds quite painless. Is it a complex process? Is it a time-consuming or expensive process?
Jonty: So, if they, sort of, a layman had to do it themselves, yes, it would be very time-consuming and it could be quite painful! But, you know, that’s why we’ve got companies like Financial Emigration that do this process, we’ve streamlined the process, we do absolutely everything for the client, so they just have to fill out a few forms for us, and we do the entire process for them, which makes it simple and easy, and you know you’re in safe hands because people that have, you know, done it before, tried and tested, you know I’m doing it, and can do it properly.
The cost varies from person to person. There can be a whole family unit that does it, or an individual, and depending on whether it is a current emigration or if we look back say for those clients that have been out of South Africa for 10 years, we then need to look at, can we backdate this emigration to the date, this emigration and the actual application backdated to the actual date that you left. Which is actually factually more compliant, but it also helps with a few things like Capital Gains Tax in South Africa, if we can backdate it to when the expat actually left.
Carlie: And can it be reversed? What if I end up being back in South Africa or earning money from South Africa and need to have a tax obligation in South Africa again in the future?
Jonty: Absolutely, absolutely. It’s an extremely simple process which, you know, you don’t need our help to do it, but we can certainly assist with it. SARS definitely wants you to pay tax, so …
Carlie: (laughs) They’d have no complaints!
Jonty: (laughs) Exactly, they make it extremely easy for you to, to start paying tax again, it’s as simple as, you arrive back in South Africa, you notify SARS and the South African Reserve Bank that you’re back, and you start filling out your tax returns every year as a resident instead of a non-resident. Simple as that.
Carlie: So if I am in a position as a South African expat where I have neglected to do this for the past 10 or so years, what would be your recommendations to start playing catch-up?
Jonty: Alright, so we provide a sort of a full service of the entire process, so what we generally start with is a tax review on your South African taxes. So we get a whole bunch of information from you, we go to SARS, we look into your taxes and see where it’s gone wrong, and how we can fix it. We then have a chat with you and say, OK, these are the problems. This is how we suggest you fix it. You know, we can do, do the fixing if you’d like or you can go to someone else, but we provide that service and we know exactly what we’re doing, and we say OK, these returns, tax returns now need to be submitted. This is how they should be submitted. And once we’ve done all of that tax work, and we’ve put you into a place where you are completely compliant with SARS, then we can start with the financial emigration process.
Carlie: That’s it for this episode. If it has hit a little close to home for you, as a South African expat, you can get in touch with Jonty for some help. If you have any questions or want to discuss anything related to South Africa, log into the forums at expatfocus.com, you’ll also find links to our Facebook groups. Remember to check out our other episodes at expatfocus.com/podcast, also on iTunes, and I’ll catch you next time.