Residence for a natural person is the ordinary place of residence of that person, i.e. the place to which he/she habitually returns and regards as his/her home.  If there are two homes the relevant Double Tax Convention will decide.  For a company or Trust it is the place where either has been formed or if formed outside South Africa the place of effective management.  For income tax purposes, that is the place where the affairs of the company are effectively controlled and for Exchange Control purposes, the same rule applies but if the majority of trustees reside outside South Africa, the Exchange Control will regard it as a non-resident Trust.

 

2. Restrictions on purchasing property by non-residents

3. Tax Consequences

A non-resident immigrating to South Africa, i.e. retiring or becoming a permanent resident, will be subject to South African tax on their worldwide income.  Thus, if those assets are donated prior to becoming a resident in South Africa to a Trust or children that person will not be subject to tax on those assets when immigrating to South Africa.  This is subject to the provisions of Section 7(5) and (8) of the Income Tax Act (“the I.T. Act”) which provides in essence that where a person has made a donation or otherwise arranged for the transfer of monies or assets to a trust whether offshore or onshore any income earned by virtue of that transaction will be deemed to be that of the person providing such monies or assets.

If the donation took place, however, before the donor becomes a resident it is unlikely that this Section can be applied.  Section 25B(2A) of the Act, however, will still apply in that any income received by a resident beneficiary from a non-resident trust will be subject to tax when received provided the resident in question was a beneficiary of the Trust in the previous tax year to that in which the monies were received, i.e. it’s a discretionary trust.

A non-resident immigrating to South Africa, i.e. retiring or becoming a permanent resident, will be subject to South African tax on their worldwide income.  Thus, if those assets are donated prior to becoming a resident in South Africa to a Trust or children that person will not be subject to tax on those assets when immigrating to South Africa.  This is subject to the provisions of Section 7(5) and (8) of the Income Tax Act (“the I.T. Act”) which provides in essence that where a person has made a donation or otherwise arranged for the transfer of monies or assets to a trust whether offshore or onshore any income earned by virtue of that transaction will be deemed to be that of the person providing such monies or assets.If the donation took place, however, before the donor becomes a resident it is unlikely that this Section can be applied.  Section 25B(2A) of the Act, however, will still apply in that any income received by a resident beneficiary from a non-resident trust will be subject to tax when received provided the resident in question was a beneficiary of the Trust in the previous tax year to that in which the monies were received, i.e. it’s a discretionary trust.

4. Capital Gains Tax

A non-resident owning property in South Africa will be subject to CGT when the property is sold.  There are no exemptions from CGT whether the assets in question were acquired before taking up residence or otherwise.  The I.T. Act has been amended to provide that conveyancers must retain 5% of the purchase price, 7.5% for companies and 10% for Trusts so as to enable the Receiver to obtain payment of CGT from non-residents selling their property in South Africa.  This only applies to transactions where the purchase price is in excess of R2 million. Whether or not the conveyancer is to deduct the first R1 million where it is a ‘primary residence’ isn’t clear! The date for its coming into operation has not as yet been promulgated.

A non-resident owning property in South Africa will be subject to CGT when the property is sold.  There are no exemptions from CGT whether the assets in question were acquired before taking up residence or otherwise.  The I.T. Act has been amended to provide that conveyancers must retain 5% of the purchase price, 7.5% for companies and 10% for Trusts so as to enable the Receiver to obtain payment of CGT from non-residents selling their property in South Africa.  This only applies to transactions where the purchase price is in excess of R2 million. Whether or not the conveyancer is to deduct the first R1 million where it is a ‘primary residence’ isn’t clear! The date for its coming into operation has not as yet been promulgated.

5. Estate Duty

In terms of the Estate Duty Act (“the E.D. Act”) the deceased estate of any South Africa resident is subject to Estate Duty at the rate of 20% on his/her worldwide assets.  There are certain exceptions to this under Section 4(e) of that Act and in particular property acquired overseas before that person because a resident in the Republic “for the first time” or the resident received a donation or inheritance from someone who at the time was a non-resident i.e. a category of property that has nothing to do with South Africa as such.  Section 56 of the I.T. Act has similar exemptions to that of the E.D. Act but in addition provides for an exemption from donations tax (i.e. currently 20% of whatever is donated) in respect of “funds derived from any trade carried on outside the Republic”.  This additional exemption probably affects many young South Africans taking a ‘gap year’.  Exchange Control also allow for these funds to be kept off-shore without disclosure.  Of course all income received from any such foreign funds are subject to taxation in South Africa.  That liability is not affected!
Therefore it is of critical importance to South Africans returning to note that property acquired overseas while they were living there does not benefit from the Estate Duty exemption because if the person is born in South Africa he/she has already been a resident and therefore the property is not acquired “for the first time”.  This means that that all property acquired overseas will be subject to Estate Duty once they become resident in South Africa.

In terms of the Estate Duty Act (“the E.D. Act”) the deceased estate of any South Africa resident is subject to Estate Duty at the rate of 20% on his/her worldwide assets.  There are certain exceptions to this under Section 4(e) of that Act and in particular property acquired overseas before that person because a resident in the Republic “for the first time” or the resident received a donation or inheritance from someone who at the time was a non-resident i.e. a category of property that has nothing to do with South Africa as such.  Section 56 of the I.T. Act has similar exemptions to that of the E.D. Act but in addition provides for an exemption from donations tax (i.e. currently 20% of whatever is donated) in respect of “funds derived from any trade carried on outside the Republic”.  This additional exemption probably affects many young South Africans taking a ‘gap year’.  Exchange Control also allow for these funds to be kept off-shore without disclosure.  Of course all income received from any such foreign funds are subject to taxation in South Africa.  That liability is not affected! Therefore it is of critical importance to South Africans returning to note that property acquired overseas while they were living there does not benefit from the Estate Duty exemption because if the person is born in South Africa he/she has already been a resident and therefore the property is not acquired “for the first time”.  This means that that all property acquired overseas will be subject to Estate Duty once they become resident in South Africa.

6. Donations Tax

The obvious point, therefore, is that anyone becoming a resident in South Africa should donate their overseas assets to an offshore Trust which will avoid income tax and CGT consequences.

The obvious point, therefore, is that anyone becoming a resident in South Africa should donate their overseas assets to an offshore Trust which will avoid income tax and CGT consequences.

Donations tax is not payable by non-residents even after taking up residence in respect of “overseas property” but again subject to the property having been acquired before that person became a resident in South Africa.  There are other exemptions, including where the funds are derived from a “foreign trade” as above referred to.

7. Exchange Control

If a person has not formally emigrated from South Africa they are deemed to be residents by Exchange Control!  However, if he/she has resided outside South Africa for more than five years he/she is then regarded as an immigrant on returning to South Africa.  The following restrictions apply to immigrants.

If a person has not formally emigrated from South Africa they are deemed to be residents by Exchange Control!  However, if he/she has resided outside South Africa for more than five years he/she is then regarded as an immigrant on returning to South Africa.  The following restrictions apply to immigrants.

7.1 Immigrants must declare that they are possessed of foreign assets and liabilities to an authorised dealer and give an undertaking that they will not make any of them available to South African residents.

7.2 After five years, immigrants to South Africa will be regarded as full residents for South African exchange control purposes but if they leave South Africa within five years, will be allowed to retransfer any funds brought into South Africa.

8. Conclusion

The really important point being that when a person moves to South Africa or buys property here there are all sorts of consequences that they should know.  To a large degree all the detrimental consequences can be avoided by donating whatever property is held prior to becoming a resident to an offshore Trust.