While National Treasury and SARS scramble for money, a new focus has been placed on the revenue service’s plans to tax South Africans working abroad, who could face having 45% of their earnings over R1 million fed back to government.

Speaking on The Money Show this week, personal financial advisor at Galileo Capital, Warren Ingram said that even though the actual rules around the tax are yet to be finalised, they are planned to come into effect in March 2020.

The new legislation has many expats riled up, with much confusion and uncertainty around the new laws, and many believing that it will not apply to them or that it will be unenforceable.

It has also brought into question whether young South Africans who are working abroad for a short time are tax compliant.

According to Ingram, many South African expats who are working abroad are currently – unintentionally – flouting the country’s tax laws, and may already owe SARS money.

“One thing (expats) don’t do is tell SARS, ‘I am no longer a tax resident’ – this isn’t a process that happens automatically, where you hop on a plane and work outside the country for six months at a time for a couple of years, and you’re fine,” he said.

What expats should do, Ingram said, is inform SARS that they are emigrating from a tax point of view (financial emigration) – but still retaining South African citizenship, passports etc.

Financial emigration is a formal SARS and SARB process to have it noted that you are no longer “ordinarily resident” in South Africa.

This remains the only formal route in law to permanently have a status change noted. This is also the only “formality” which has been noted in the National Treasury Parliamentary response document to the new expat laws, which ensures that the coming tax changes do not apply to South Africans abroad.

According to Ingram, when financial emigration is registered, SARS then treats the situation as if those citizens are selling all their assets in the country (even if they are not) and they need to pay tax on that amount as capital gains tax to give SARS its share.

“That’s the trade-off that you make when you do this financial move out of the country,” he said, adding that after that point, you can settle in another country and do what you do, and you will be okay.

New big expat tax

According to Ingram, if you have not done the financial emigration process outlined above, under the new regulations you will be taxed at a rate of 45% on anything you earn anywhere in the world over R1 million from March 2020.

That’s the “train coming down the tunnel”, he said, but the fact remains that if a South African citizen hasn’t formally financially emigrated, they likely already owe SARS 18% (as Capital Gains Tax) on the money and assets they have accrued overseas.

“So you’re already potentially in trouble,” he said.

The key is in keeping SARS informed because the revenue service treats South African citizens as liable to taxation whether they are in the country or not. If you are a citizen, you must pay your dues.

The coming 45% tax may still be challenged, delayed or reworked, but according to Ingram it’s definitely coming, and will likely get pushed through by government because it’s seen as a tax on the wealthy, which is politically palatable.

“If you’re a politician who cares about the next election and not the 20-year future of the country, this is really appealing, and one I think they are definitely going to drive,” he said.

The unforeseen consequence of this, he said, is that it incentivises skilled South Africans abroad to simply not come back.

“The skilled talent – and we have such a small base – is saying, ‘you know what, I need some experience globally for a period of time, and I will come back’ – and SARS is thinking of a short term gain – let’s tax them.”

“These skilled people will now go ‘hang on, actually why should I come back?’” he said.

According to Ingram, the revenue likely to be collected through the new tax laws will be tiny, but the message sent to professionals and skilled individuals will have a wider-reaching impact.

“Sure, they (expats) benefitted from free (or subsidised) education, and used the country’s services while they were growing up here – but you want these people to come back,” he said.

“These are people who are thousands of kilometres away, consuming nothing in South Africa, with the potential to bring a lot of money back into the country  – and now we’re creating a tax incentive for them not to do that.”