South Africa is increasingly attracting people who are choosing to relocate, return or spend a greater portion of the year in the country. Whether drawn by its lifestyle, favourable climate, investment opportunities or relatively low cost of living, more individuals with international assets and financial interests are establishing tax residency in South Africa. While the move offers many benefits, it can also have significant tax implications.

South African tax residence is not determined only by citizenship, immigration status or the purchase of immovable property. A  person becomes tax resident in South Africa under our domestic laws if they are either "ordinarily resident" in South Africa or spend enough time in the country to meet the physical presence test, unless a double tax agreement treats them as a tax resident of another country. In broad terms, a person is ordinarily resident in South Africa if South Africa is their real or settled home or the place to which they would naturally return after temporary periods of absence. A person who is not ordinarily resident may still become tax resident under the physical presence test if they spend sufficient time in South Africa over a five-year period.  A person can become "ordinarily resident" in South Africa from their date of arrival if there are sufficient ties indicating they intend to make South Africa their "new home". Only if this is inconclusive (i.e. they retain strong ties in another jurisdiction) will the physical presence test become relevant.

In either case, the provisions of a tax treaty should be considered to determine whether a person is regarded as treaty resident in another country. If so, treaty residence will trump, and they will not become tax resident in South Africa even if they meet one of the local tests. From the date a person becomes a South African tax resident, they are taxed on their worldwide assets and income. Their worldwide assets are assigned a market value on that date so that only future gains are subject to tax.  It follows that only the post-residence growth in these assets is taxable in South Africa. It is therefore important to have all assets valued on becoming tax resident.

Conversely, when South African residence ceases, the residents are deemed to dispose of their worldwide assets at market value at the time, attracting an exit charge on the appreciation of their worldwide assets. Unless the jurisdiction they are moving to allows a similar step-up in base, the same amount may be taxed again by another jurisdiction upon their actual disposal.

The tax implications of a move to South Africa can also extend to the tax position of any foreign companies, trusts, foundations or other structures in which new residents hold interests. Any involvement in the management of foreign entities from South Africa may draw those foreign entities into the South African tax net.

Moving to South Africa also holds opportunities to plan foreign asset holding prior to arriving in South Africa. Foreign structures funded with proper planning before South African tax residence commences can be a tax-efficient way of investing.

South African tax residents are, in principle, taxed on worldwide income and capital gains, subject to any relief in terms of applicable tax treaties or rebates for foreign tax paid. This means that the South African tax implications of foreign-source income, pension payouts, trust distributions, and gains on foreign investments should all be considered.

Without attempting to be comprehensive, we discuss a couple of typical foreign investment streams derived by foreigners moving, or ex-South Africans returning, to South Africa.

Foreign pensions:

In terms of many of South Africa's tax treaties, South Africa is allocated exclusive taxing rights in relation to pension payments received by South African tax residents. However, South Africa exempts foreign pensions derived as a result of past employment outside South Africa. In these cases, the tax efficiency of retirement in South Africa is obvious. 

Foreign dividends: 

Generally, South Africa will levy tax at a maximum rate of 20% on foreign dividends, subject to credits for foreign taxes on these dividends. Tax treaties may limit the foreign tax which can be levied (and thus credited in South Africa).

Foreign dividends on equity interests of 10% or more are likely to qualify for the participation exemption on foreign dividends.

Foreign interest:

South Africa taxes foreign interest of residents at maximum income tax rates, subject to tax credits for foreign taxes levied.

Foreign capital gains:

South African tax residents who are natural persons are subject to capital gains tax at a maximum rate of 18% on any capital gains derived from the disposal of their worldwide assets, subject to tax credits for foreign taxes payable. Gains are determined with reference to the stepped-up tax base for assets on becoming tax resident in South Africa, as explained above.

The disposal of substantial foreign equity interests (10% or more) held for 18 months or longer can qualify for the foreign capital gains participation exemption, in which case no South African tax will be payable.

Foreign rental income:

Generally, tax treaties allocate primary taxing rights to the country where the rental-earning property is situated. South Africa would, however, also tax and give a credit for the foreign taxes. In countries with generous tax thresholds for rental income, it often is the case that the South African tax exceeds the foreign tax on the rental income.

Foreign funding from discretionary family structures:

South Africa has complex rules governing the taxation of awards to South African beneficiaries of foreign family structures. To determine the tax, a South African exercise is required to categorise the retained funds in the structure in accordance with South African tax principles. Awards must be allocated to a specific category. of such retained funds. Although the process to categorise the retained funds could be onerous, the result is often that tax efficient funding can be made from foreign structures to South African tax resident beneficiaries. Planning before arrival in South Africa is often critical to achieve the tax efficiency in this regard. 

The tax implications of becoming South African tax resident are manageable and, in certain instances, allow for tax efficiency, but should be considered early. Proactive advice can help to avoid unexpected tax leakage, preserve flexibility, and ensure that offshore wealth structures remain appropriate once South African tax residence becomes relevant. 

Written by Doelie Lessing, a Director and Head of Private Wealth; Luke Magerman, a Senior Associate; and Mike Searle a Candidate Attorney at Werksmans Attorneys