FAQ – Tax liability after living abroad

 A person, who has been living abroad for many years, is concerned about his tax liability once he returns to South Africa. He writes:

I am a South African citizen, but have been based abroad for many years and have never worked in SA. I am, however, planning to retire in SA.

I have read that as a permanent resident I will be assessed on worldwide tax assets.

I intend to derive all my retirement income from offshore investments, all of which have been funded from earnings outside SA.

Is there any way to minimise my tax liability once I return to retire and reside in SA permanently?

Dirk Kotze, tax partner at Mazars, responds:

You are quite correct that your return to South Africa on a permanent basis will result in you being classified as an ordinary resident.

Therefore you will be liable in SA on your worldwide income, subject to double taxation relief that may be afforded by Double Tax Treaties between SA and the countries where these investments are held.

Unfortunately, there is not much that can be done to minimise the SA tax liability, especially if funds are physically flowing to cover your living costs.

Your question does not deal with the specifics as to what type of investments you have (shares, cash, fixed property), where it is made (country invested) and in what vehicle it is invested in (your personal name, a trust).

Foreign dividends will be taxed in SA at a maximum of 15% of the gross foreign dividend. Interest from foreign sources will however be taxed fully in SA.

As the income will not represent trade income, there will also be limited deductions that can be claimed.

As a retired individual, these would mainly be medical aid contributions and expenses not covered by the medical aid.

There are also limited tax benefits from investing the assets in a foreign trust. At the moment foreign trusts are essentially subject to the same tax rules as SA trusts.

If you have donated or are funding the foreign trust assets via a loan account, all the income, and potentially even some of the capital, may be fully taxed in SA.

During the 2013 Budget Speech there was also mention made of planned changes in the tax laws pertaining to trusts. At this point it is uncertain as to how and when these will be introduced.

A foreign company as an investment vehicle may also have limited tax planning benefits unless the shares are held by a foreign trust.

However, as mentioned above, the funding of the trust may result in any potential tax benefit being nullified.

Should the foreign investments be in your own name, then transfer into a different investment vehicle may have its own tax consequences that should also be considered as part of the transaction.

Care must also be taken with regards to SA foreign exchange regulations.

While you may never have worked in SA, unless you have formally emigrated you would have remained a “citizen” for the purposes of the Reserve Bank. If so, full details of your foreign investments must be disclosed to the foreign exchange department of your local bank.

The above is a general view based on the limited information provided. A tax adviser will be able provide more specific information based on your particular circumstances and investments.