Avoid tax while working abroad

FORMAL EMIGRATION: MANY PITFALLS CHASING GREENER FIELDS

Brian Butchart, CFP® professional, and Managing Director of Brenthurst Wealth advises a reader on emigration and taxation.

Question: My son has been working in Hong Kong for the last nine years. He remitted R3 million to South Africa to build a property here. He has not emigrated formally and has not submitted tax returns to Sars for nine years.

In 2008, he asked his tax practitioner to contact Sars to terminate his tax number. He thought all was in order. He has a local bank loan of R3 million, secured by a property worth R6 million.

Now Sars won’t allow him to repatriate some of the funds.

He also asked for a clearance certificate to invest R2 million offshore but Sars insisted on his tax returns for the last nine years. He has a Hong Kong passport and has relinquished his South African residency and citizenship.

How will his property investment in South Africa be treated? Will his investment and funds be blocked forever without his tax returns?

Answer: South African taxes are based on residency. Although your son has relinquished his passport and citizenship, he has a property in SA and remains a registered taxpayer and has not formally emigrated. Sars views this as “world-wide wanderings” with the intention to return.

Look at the South African residency test – “ordinarily resident” under our common law suggests you are ordinarily resident where you see your permanent “home”; where you would tend to return to after your world-wide wanderings.

Therefore you would still be “ordinarily resident” in South Africa and subject to world-wide tax here, no matter how long you lived “temporarily abroad”.

Fortunately foreign earnings are exempt provided you are abroad for more than 183 days, of which more than 60 days are continuous. All other income and capital gains are subject to local tax, even if taxed where you are living. You get double-taxation relief only if your resident country has a Double Tax Agreement with South Africa.

Although your son has been working in Hong Kong for the last nine years, he has remained a taxpayer at Sars. So he is obliged to submit tax returns annually, and only becomes a non-resident taxpayer once he formally emigrates.

However, as he has a property asset in SA, I would suggest he remains a taxpayer to allow flexibility to move these assets at a later stage should he wish to do so.

Exchange controls allow for individual taxpayers to transfer up R1 million per annum abroad without tax clearance. So your son can take R1 million every calendar year.

Assuming your son was not earning any income in SA over the last nine years, he could simply submit nil tax returns for every year, bringing his tax returns up to date.

I believe once he has brought his taxes up to date he would be granted the tax clearance.

Finally, consult a tax professional to assist.

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