What will leaving South Africa cost you from a tax perspective?

What is exit tax and when does it apply? 

When ceasing to be tax resident, an individual is deemed to have disposed of his / her worldwide assets for an amount equal to the market value of these assets on the day immediately before the date they cease to be tax resident, with certain exemptions. Depending on the assets, the impact of this deemed disposal may result a significant amount of tax due to SARS.  

The rationale behind this exit tax is to ensure that South Africa captures the capital appreciation of assets that occurred while the individual was still a tax resident. Once residency is broken, South Africa generally loses taxing rights over future gains on those assets. Therefore, the exit tax acts as a final tax sweep on unrealised gains accrued during the residency period. 

High-net-worth individuals, in particular, often have diverse portfolio of assets, with high growth assets or shares in a private company that were acquired for little value. They may also have invested in immovable property outside of South Africa, resulting in an added gain in foreign currency, resulting in taxes being due to SARS, with no liquidity to make payment. 

It is important to note that the exit tax is triggered as a result of cessation of tax residency. The cessation of tax residency is not always triggered by way of a formal emigration or relocation to another country. South African individuals, working and living in multiple countries including South Africa, should also be mindful that they could cease to be tax resident in South Africa as a result of an application of a double tax agreement. Spending time in another country could trigger being a tax resident in that country, which could result in them ceasing to be tax resident in South Africa under a double tax agreement and trigger exit tax in South Africa. Obtaining tax advice regarding your tax residency status is, therefore, crucial. 

What assets are excluded from the exit tax: 

Certain assets will be excluded from the exit tax payable on ceasing to be tax resident: 

• Any immovable property that is located in South Africa; 
• Any assets owned by a South African inter vivos trust, where the person that is ceasing to be tax resident in SA, is only a discretionary beneficiary; 
• Any interest in a South African approved retirement annuity fund, provident, pension fund, or provident or pension preservation fund; and 
• Any endowment policies issued by a South African insurer where the person that is ceasing to be tax resident in SA is the original owner of the policy. 

When is the exit tax due to SARS? 

When ceasing to be tax resident, the year of assessment of the individual is deemed to end on the date immediately before the day the individual ceases to be resident. The next succeeding year of assessment is then deemed to commence on the day on which the individual ceases to be tax resident. 

Where the individual is not a provisional taxpayer, the exit tax would only be payable as part of his / her assessed tax when the annual tax return for the year of assessment that he / she ceased to be tax resident is assessed. 

However, where the individual is a provisional taxpayer, the exit tax would be payable as a provisional tax payment by no later than the date before he / she ceases to be tax resident. The individual is required to submit a provisional return that includes his / her estimated taxable income for the tax year that commenced on 1 March and on a date immediately before the date of ceasing to be tax resident. For example, if an individual ceases to be tax resident on 13 May 2026, their 2027 year of assessment as a resident will commence on 1 March 2026 and end on 12 May 2026, with a new year of assessment as a non-resident beginning on 13 May 2026 to 28 February 2027. 

The estimated taxable income for purposes of the provisional tax return so submitted, must include the calculated taxable capital gain as a result of the deemed disposal of worldwide assets. The exit tax is effectively paid as a provisional tax payment before the date of cessation of tax residency.   

Should you fail to make the provisional tax payment timeously you may face interest and penalties.    

How is the exit tax calculated? 

The deemed disposal of assets as a result of cessation of tax residency is deemed to be for proceeds equal to market value of the assets on the date before cessation tax residency. 

The aggregate capital gain (being a summation of all gains) will be subject to an annual exclusion (currently R40,000 per annum) but that will be apportioned based on the number of days that the individual was a tax resident in South Africa. 40 per cent of this amount will then be included in the individual’s taxable income in the year that the individual was a tax resident and will be taxed at his / her marginal rate of tax. In cases where the individual’s marginal rate of tax is 45%, the effective tax rate on capital gains is 18%. 

In cases where the deemed disposals are significant, the taxpayer may need to liquidate assets in order to be able to pay SARS the exit tax due. 

What if you never paid your exit taxes? 

It is quite common for South African individuals who have relocated to another country to only seek advice after the move has taken place. In the absence of a formal declaration to SARS to update their tax residency status, SARS will still regard these individuals as tax residents.  

The date a person ceases to be tax resident is based on objective facts and is not simply a date or status that the person may elect.  

Where an individual had significant assets attracting capital gains tax in South Africa at the time of ceasing to be tax resident, this could result in a substantial tax bill being payable to SARS. Depending on the amount of tax due, an individual may consider applying for relief from penalties by submitting an application under the Voluntary Disclosure Programme.   

Planning and obtaining tax advice ahead of your departure from South Africa is essential to ensure you have sufficient liquidity or access to funding to settle your SARS liability. 

Step-up in base cost 

Although you are deemed to have disposed of your worldwide assets at market value when ceasing to be tax resident in South Africa, your new country of residence may not provide relief in respect of future disposals by providing a step up in your base cost of these assets. 

For example, where an individual has held listed shares in a share portfolio for a number of years before ceasing to be tax resident. 

From a South African tax perspective, there will be a deemed disposal of these shares at the market value of the shares when ceasing to be tax resident. This disposal is, however, a fiction and not an actual disposal. When the actual disposal takes place on a date after ceasing to be tax resident in South Africa, there will be no capital gains tax payable in South Africa, as the taxpayer would be a non-resident, but in the taxpayer’s new country of residence, the base cost used in the actual capital gains tax calculation in that country might be the original cost of the shares when acquired. 

In addition, the new country of residence might also not provide any foreign tax credit in respect of the SA tax paid as a result of the deemed disposal, to provide relief from double taxation. 

Tax advice therefore needs to be sought in the new country of residence to mitigate double taxation. 

Conclusion 

Ceasing to be a South African tax resident is a complex and a consequential decision. It requires careful planning, accurate record-keeping, and a clear understanding of both South African and foreign tax laws. Engaging with a tax advisor early in the process is essential to manage risks, avoid penalties, and ensure compliance. 

Authors:
Khumo Appies, Tax Consultant & Sharon MacHutchon, Manager