Simone Esch - Director & Head of Tax | PKF Cape Town

As more South Africans consider emigration, whether for security, lifestyle, career, or financial reasons, many overlook the significant tax consequences of formally ceasing South African tax residency. This is especially critical for individuals with substantial asset portfolios both locally and abroad. Understanding the tax framework is essential to avoid unexpected liabilities, including the risk of double taxation.

Exit Tax

The most immediate financial consequence of ceasing tax residency in South Africa is the imposition of Capital Gains Tax (CGT), commonly referred to as the "exit tax." This tax is triggered under Section 9H of the Income Tax Act (ITA), which deems a notional disposal of an individual’s worldwide assets (subject to certain exceptions) the day before they cease to be a South African tax resident.

The rationale is that the individual has benefited from South Africa’s public infrastructure and services while resident and must therefore settle tax on the accrued gains of their global assets up to the point of departure. After ceasing residency, only South African-sourced income remains taxable in South Africa.

The exit tax applies to most asset types, including, but not limited to:

• Unlisted company shares
• Listed stocks and bonds
• Shares in South African immovable property companies
• Foreign immovable property
• Vested interest in the assets of a local trust

However, certain assets are excluded from the deemed disposal rule (as these remain taxable in South Africa even after the individual becomes a non-resident) and include;

• Immovable property located in South Africa
• Interests in approved South African retirement funds
• Assets linked to a permanent establishment in South Africa
• Employee share incentive shares (subject to sections 8A, 8B or 8C of the ITA)

The resulting capital gain is calculated as the difference between the market value of the worldwide assets on the date of deemed disposal and their base cost. This gain is then subject to a maximum effective tax rate of 18% (assuming the individual's marginal income tax rate is at the highest rate of 45%).

Double taxation risk on foreign property

Individuals who own foreign property should exercise caution when relocating to the jurisdiction which imposes capital gains tax and where the foreign property is situated, as this may give rise to double taxation upon the property's eventual disposal.

This situation arises because South Africa imposes capital gains tax on a deemed disposal of foreign property at its market value the day before an individual ceases to be a tax resident. In addition, the foreign country where the property is located will levy tax on the actual capital gain when the property is eventually sold, calculated as the difference between the sale proceeds and the original base cost (the foreign jurisdiction will most likely not recognise a step-up in the base cost of such property situated in that country in which the individual is now resident).

Since no actual sale takes place at the time of ceasing residency, no foreign tax is triggered, and therefore no foreign tax credit (FTC) under section 6quat of the ITA can be claimed in South Africa. Additionally, relief under applicable Double Tax Treaties (DTTs) is generally unavailable in this scenario. This is because section 9H of the Income Tax Act deems the disposal to occur while the individual is still a South African resident, thereby preserving South Africa’s taxing rights.

As a result, the same capital gain may be subject to tax twice: first in South Africa upon cessation of residency, and again in the foreign jurisdiction when the property is sold.

This legislative gap effectively penalizes individuals for ceasing South African tax residency, resulting in a higher tax burden than if they had remained residents and sold the asset in the ordinary course.

Formalising Non-Resident Status

Merely leaving South Africa is not enough to terminate tax residency. Non-compliance with the formal cessation process leaves the individual liable for tax on their global income in South Africa.

In the year of emigration, taxpayers must navigate the complexities of dual tax status and must declare worldwide income for the period of residency and only South African-sourced income for the period thereafter. The final tax return (ITR12) must reflect the change in residency and include the exit tax liability from the deemed disposal.

To be recognized as a non-resident, individuals must prove to SARS that they are no longer “ordinarily resident” in South Africa or has become a tax resident of another country through the application of a double tax agreement (DTA).

Ordinary residence is determined through a factual enquiry, guided by objective criteria that support the individual's subjective intention to permanently depart South Africa and no longer regard it as their real home. Where it is established that a person has ceased to be ordinarily resident, the change in tax residency is effective from the date on which they left South Africa with the intention not to return.

If an individual, who is resident by virtue of the physical presence test wishes to cease his SA tax residency, that person must be physically outside the Republic for a continuous period of at least 330 full days after which that person will be deemed to have ceased to be a resident from the day such person left South Africa.

The cessation of residency process includes updating the RAV01 form on SARS eFiling with the relevant date, supplemented by a comprehensive submission of supporting documentation to evidence the establishment of a permanent, ordinary residence in the new country or exclusively resident of the foreign country in terms of an applicable DTA.

Given the complexity of the exit tax and the potential for costly mistakes, professional tax advice is strongly recommended. Proper planning can help mitigate risks, ensure compliance, and structure the emigration process in a tax-efficient manner.