- Wealthy South Africans Relinquish Tax Residency, Impacting Revenue
South Africa is witnessing a rising trend of high-net-worth individuals opting to cease their tax residency.
This shift is driven by better investment opportunities, higher income potential, and improved lifestyle conditions abroad.
Tax Exodus and Revenue Loss
According to the South African Revenue Service (SARS) 2024 Tax Statistics, approximately 38,000 South Africans have formally ended their tax residency. This has resulted in an estimated R3 billion loss in tax revenue.
The financial implications of this trend are significant. In 2023 alone, 1,700 millionaires left the country, leading to a revenue loss of R5 billion in taxable income and nearly R2 billion in assessed tax.
Formalizing Non-Residency
Chavaughn Phillips, an Expatriate Tax Specialist at Tax Consulting South Africa, emphasizes that ending tax residency is a formalized process.
“It is necessary to follow SARS’ guidelines to transition from being taxed on worldwide income to only paying tax on South African-sourced earnings,” Phillips explains.
South Africans may end their tax residency for various reasons, including retirement, tax exemptions, relocation, or even death. Once non-residency is formalized, individuals may be exempt from South African tax on foreign income.
Advantages and Drawbacks of Non-Residency
The decision to cease tax residency comes with both benefits and challenges.
Benefits:
- Protection from taxation on global income
- Exemption of foreign assets acquired post-residency cessation
- Compliance with SARS regulations
- Tax relief on dividends, donations, and retirement funds
Challenges:
- “Deemed disposal tax” on worldwide assets as of the effective date
- Offshore remittances, even under R1 million, may require SARS clearance
- Potential restrictions on future re-entry into the South African tax system
Economic Consequences
While individuals may find financial relief in ending their tax residency, the broader impact on South Africa’s economy is concerning.
The steady outflow of affluent taxpayers could lead to reduced investment, economic contraction, and a decline in tax revenue. This situation exacerbates existing economic pressures, potentially slowing down national growth.
Motivations Behind the Shift
Many South Africans cite double taxation, high tax burdens, and the need for foreign income protection as key reasons for their decision.
Additionally, those planning to leave South Africa permanently or temporarily see tax non-residency as a strategic financial move.
Demographic trends indicate that Baby Boomers and Millennials are leading this shift, with many married couples applying together when they meet the necessary criteria.
SARS’ Response
In light of the growing number of taxpayers formalizing non-residency, SARS is taking proactive steps. A specialized expatriate unit is being established to manage compliance and monitor this evolving landscape.
Phillips cautions that taxpayers should be well-informed before making this decision. “There are many misconceptions that could mislead taxpayers, resulting in rectifications later. Proper guidance is essential.
The Future of South Africa’s Tax Base
As more South Africans opt for tax havens or countries with favourable tax policies, SARS faces an ongoing challenge. While individuals may benefit from global tax relief, the long-term economic impact on South Africa remains uncertain.
With increasing numbers of wealthy taxpayers departing, the question remains: How will South Africa navigate this shifting tax landscape and sustain its revenue base in the years to come?
