End to ‘financial emigration’

The bold move by Finance Minister Tito Mboweni to phase out the process of emigration through the South African Reserve Bank (Sarb), announced in his budget speech on Wednesday, received wide applause.

Government is sending out a clear message that the abuse of financial regulations to create a tax industry that cross-sells banking solutions as a tax process or a “tax status change” will no longer be tolerated, said Hugo van Zyl, cross-border tax and exchange control specialist.

“It is of great interest to note that it is clearly only the Reserve Bank formal emigration process and not the tax emigrations that are being given a sunset death knell.”

Van Zyl said it was a bold move to end the incorrect use of a bank process as a tax compliance process.

Henry Hollingdrake, director at Falcon Marine Consulting, said the phasing out of the emigration process through Sarb will end the concept of “financial emigration”.

“It created confusion for South African expats, and in fact has resulted in incorrect advice being given,” said Hollingdrake.

“Expats were advised that once they have ‘financially emigrated’ then they are no longer a tax resident in South Africa.”

The catalyst for the “financial emigration” solution was the change to the tax exemption provision in the Income Tax Act on foreign earnings of South African tax residents abroad.

Initially the tax-free amount was limited to R1 million per annum, but Mboweni announced an increase to R1.25 million in his budget this week. The change will be effective from next month.

Hollingdrake said people who “financially emigrated” were under the impression that they escaped the SA tax net and that their foreign income would not be taxable in SA.

“This was incorrect, as financial emigration is merely an indicator that someone may be non-resident [for tax purposes]. In fact, certain SA expats who have financially emigrated are still tax resident since they are still considered to be ordinarily resident in South Africa,” said Hollingdrake.

The emigration process will now shift to the South African Revenue Service (Sars), and there will be a validation confirmation process to see when the Section 10 foreign income exemption is applicable or not. For this the ordinary resident test and the physical presence test will still be used to determine the tax status of people living and working abroad.

Moneyweb

The Banking Association of South Africa (Basa) fears that if the stateowned bank is not implemented cautiously, the unintended consequences for the country may be dire.

Finance Minister Tito Mboweni announced in his budget speech on Wednesday that national treasury is ready to set up the state-owned bank mentioned during President Cyril Ramaphosa’s State of the Nation address.

Basa said that although it may not fully understand the necessity for a state-owned bank, it believes that increased competition in the banking industry would benefit South Africans.

“However, competition in the banking industry is already fierce and four new banks have recently entered the South African market; 80% of South African adults have access to a transactional bank account and banks are committed