South Africans abroad must prepare for new ‘expat tax’

South African Darryn Keast has been living abroad for nearly 22 years and has no intention of returning to his country of citizenship. The managing director of a small Dubai medical business, he has already cut off most of his financial ties to South Africa, having closed bank accounts and sold property many years ago.

Yet Mr Keast — as well as many others among the estimated 20,000 to 60,000 South Africans living in the UAE, based on South African embassy figures — now face the prospect of being taxed due to a new amendment in the country’s tax legislation.

With the new system set to come into effect next March, there is uncertainty and confusion as to how it will affect South African residents in the UAE and many are scrambling to adjust their circumstances accordingly and formalise or finalise their tax status.

“People are fearing the costs and still got their heads in the sand, because, you know, March is still a long way away,” says Mr Keast, who has been a UAE resident since 1998.

The amendment limits the exemption for foreign employment income tax — also known as the “expat tax” — to income of up to 1 million rand (Dh260,760). Anything above that will be taxed at the rate of the highest income brackets, either 41 per cent or 45 per cent.

South Africa has a residency-based tax system whereby residents are taxed on their worldwide income, subject to certain exclusions. Under a double tax agreement with the UAE, a provision included a pre-emptive exemption. That means South African residents who spend more than 183 days in employment outside the country, as well as for a continuous period of longer than 60 days during a 12-month period, were not subject to taxation.

South Africa’s National Treasury announced the amendment with the new exemption limit in 2017, but made it effective from March 2020.

Financial emigration

Mr Keast, 47, has made the decision to financially emigrate and plans to return to South Africa in the summer to submit the paperwork to a local bank. That includes filling out an emigration form downloaded from the South African Reserve Bank website and providing proof he has been out of the country for at least five years.

Signing the form means cancelling any local credit or debit cards, permanently relinquishing South African residence and having no plans to return and work in South Africa within a period of five years from the date of emigration. If the individual does return within that time period “all funds exported from South Africa will be returned to South Africa, other than the applicable foreign capital/individual foreign capital allowance”.

“I’ve been out for a lot longer than five years and I’m not going back in the next five years, or possibly ever,” says Mr Keast, who is married to a Canadian and has three children, aged 7, 12 and 13. “I’m not going to expose myself to a situation where I have to pay tax for something I’m not receiving.”

Mr Keast says there is a lot of misinformation as to how to financially emigrate and “scaremongering” that South African expats will be subject to paying back taxes.

“Some of these sharks in Dubai — these financial advisers — they scare you into having to do something and they want to get a whole lot of money out of you. But I found out that it’s actually not that expensive.”

Mr Keast says he has been quoted emigration costs of up to Dh20,000, but estimates it should cost a small fraction of that.

Keeping the South Africa connection

South African Brett Smyth, 37, has lived in Dubai for 10 years and is the founder and chief executive of a management consultancy in the emirate. He says he is exploring setting up a branch of his company in Johannesburg or Cape Town, and does not want to close the door on South Africa.

“I love home and I would definitely want to move home again,” Mr Smyth says. “I don’t want to do something that, when I do want to move home, I’m not allowed to.”

At the same time, he says that with such high taxes it begs the question, “Is there a point in working overseas”?

“1 million rand is like Dh20,000 a month. And they take into account your benefits, like schooling … so people will exceed that,” says Mr Smyth. “If you have to pay 45 per cent off that, it really doesn’t make much sense.”

Mr Smyth says he has contacted a tax adviser in South Africa to “make sure my tax returns are up to date and to better understand what my options are”.

A tough choice

South Africans in the UAE feel they are between a rock and a hard place, as they cite the challenges of moving back home, including difficulty in finding employment, electricity cuts and security concerns.

Christelle Dunn, a former accountant, moved to Dubai with her husband, an IT professional, in 2014 to seek out new opportunities and provide a stable environment for their children, now aged 2, 4 and 6.

“It does aggravate you somewhat that you want to be with your family back home, but it is not the best time to look for a job in South Africa,” says Ms Dunn, 37.

“Now that they want to tax us, it makes no sense economically to stay here. But you also don’t want to go back because you feel there is no future for you there,” she adds.

South African expats in the UAE argue that the tax would put them at an extreme disadvantage, given the high cost of living here.

“It’s not like we are living a life of luxury, living in the Burj Khalifa and travelling all the time. It’s just a typical suburban life that we’re living,” says Ms Dunn. “I think that sometimes people in South Africa think that because you live in Dubai, you’re dripping off gold — and that’s just not the case.”

What the tax specialists recommend

Claudia Apicella, an expatriate tax specialist at Tax Consulting South Africa, says it is important to start by formalising your tax status. Many clients have numerous assets, resident bank accounts and family members still in South Africa.

“Although a lot of them fit the non-tax resident requirements, the information in South Africa that SARS (the South African Revenue Service) and the South African Reserve Bank has, still places them on file as tax residents. This leaves their non-tax residency status open to interpretation. So a lot of them are going to be hit with this new tax law,” says Ms Apicella, who has many clients living in the UAE.

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Expatriates have the right to have assets in South Africa and still be considered as non-tax residents, but they must prove they are UAE residents and that their intention is to stay abroad long-term.

The options then are to go through the process of applying the double taxation agreement (it is not automatic), financially emigrate or remain tax residents on file and start paying the tax liability on their foreign income in March.

To apply the double taxation agreement, individuals must first obtain a tax domicile certificate from the UAE’s Ministry of Finance at a cost of approximately Dh2,100. SARS will ask various questions, including where the expatriate holds citizenship, and where that individual’s “centre of vital interests” and “habitual abode” are. If the scale leans towards South Africa, “the likelihood of an individual being able to successfully apply a DTA is minuscule,” says Ms Apicella.

Financial emigration involves paying any applicable exit taxes based on an individual’s worldwide asset holdings, says Tanvir Anwar, director of tax at PwC in Dubai.

It is also important to note that if an individual continues to have a source of income from South Africa, such as a rental property, then tax returns must be filed regardless of tax residency status, adds Kesiree Mari, expatriate tax manager at PwC South Africa.

What next?

“At the moment, there is a lot of anxiety in terms of what’s happening,” says Mr Anwar. “While we have the law per se, the actual implementation hasn’t been provided.”

There is also still a chance that things may change. Ms Apicella says her tax firm was involved in making a submission to SARS in December to ask that fringe benefits, such as housing allowances, be excluded from tax. SARS and the National Treasury rejected the proposal, but responded that a submission could be made to Parliament.

“Whether or not, it’s going to be a favourable outcome, it is unknown,” she says.

Thousands of expats are still fighting the tax itself. The South African Expats Tax Petition Group, started in March 2017 by Abu Dhabi resident Barry Pretorius, submitted a petition to SARS and the treasury with 13,000 signatures in August 2017. The group helped negotiate the 1 million rand exemption — as the initial proposal was to delete the expatriate exemption completely — and is now seeking to form a new expatriate petition to Parliament.

Some South Africans are taking a wait-and-see approach, especially given that general elections to elect a new national assembly and the next president will be held in May.

But tax experts say it is important to start putting a plan into action now as it can be a long process to go through the necessary tax-compliant procedures. “The sooner, the better,” says Mr Anwar.