Exit tax is something every emigrating or emigrated South African needs to know about.

The moment you deregister as a taxpayer with SARS – a process called ceasing tax residency – you will have to pay exit tax.

But if you don’t cease tax residency, you could end up owing SARS capital gains tax (CGT) on assets you sell in your new country of residence. This is on top of paying income tax to South Africa on your annual worldwide income.

What is exit tax?

Exit tax is CGT you must pay on certain assets when ceasing tax residency with SARS, even though you didn’t sell them. This is because SARS sees your locally resident self as having sold these possessions to your non-resident self living in another country.

Looking at the bigger picture, your final tax obligation comprises:

• Any personal income tax payable on your final tax return declaring your worldwide earnings
• Including all outstanding CGT payable on the actual disposal of any of your worldwide assets
• Plus, exit tax payable on the deemed disposal of selected worldwide assets you retain but whose value will transfer to your new country of residence

Why is exit tax important?

When you emigrate, you do not automatically cease tax residency and exit tax is not levied until you do. Instead, you need to inform SARS that you have ceased tax residency using the proper form.

Even then, you must provide SARS with objective evidence of your intention to reside outside South Africa permanently. If you do not, they will continue to treat you as a resident taxpayer and any property you buy and sell in your new home country will be subject to South African CGT.

Of course, if there exists a tax treaty between your new jurisdiction and South Africa, the local tax authority may provide you with tax credits that can offset any tax payable to SARS.

However, it is better to cease tax residency and pay your exit tax in full to be free of the burden of South African CGT in the future.

How exit tax works

Exit tax is levied in the same way CGT is when you dispose of assets while still residing in South Africa.

For individuals, that means 40% of the profit they take on the deemed disposal of an asset is subject to exit tax. For trusts, the figure is 80%.

That taxable portion is then added to your annual income to determine the rate of tax you will pay on it, which might be higher than your normal tax rate.

Remember that South Africa works on a system of progressive taxation. This means your annual income is divided into tiers of predefined amounts and each is taxed separately at a prescribed tax rate ranging from 18% for the lowest tier to 45% for the highest.

Adding to that the taxable portion of your capital gains may or may not push your income into a higher tier. Regardless, your upper tier determines the rate you will pay on those gains. For example, if your upper tier is 41%, you will pay 41% of the entire taxable gains.

Which assets are affected by exit tax

Exit tax is not levied on everything you own, only selected items whose value you will enjoy in your new place of residence.

Excluded from exit tax is:

• Personal use possessions, like your clothes and mobiles devices
• South African fixed property you continue to own after you depart, that would attract CGT when sold later
• Your retirement annuity, pension and provident funds
• Cash you take with you

However, exit tax does include the following assets:

• Fixed property you own in foreign jurisdictions
• Trusts, depending on how they are structured and the assets involved
• Shares, unit trusts and similar investments
• Cryptocurrency and cryptoasset holdings

Note that the first R2 million in profit on the sale of your primary residence is excluded from CGT and therefore exit tax as well.

Planning for exit tax

Exit tax can place significant strain on the finances earmarked for your new life outside South Africa, so it is important to plan for it carefully.

For example, ceasing tax residency typically ends your tax year earlier. Doing so at the start of the tax year means your final income as a South African taxpayer will be far less than at the end of the tax year. Adding deemed capital gains to this smaller amount can yield a lower tier tax rate and therefore lower exit tax on the same amount.

Strategies like this can work to your advantage, resulting in substantial savings.

So, with a bit of forethought, you can protect your foreign investments from future CGT while paying the lowest exit tax possible.