Imagine you’ve lived outside South Africa for several years and now want to transfer the proceeds of an investment you left behind. The investment has been sold, the money is in your bank account and you’ve agreed an exchange rate. Then the bank asks for evidence of your tax position and the source of the funds.
The sale documents are easy enough to find. Explaining when you stopped being South African tax resident, and what happened to the investment for tax purposes at that point, may take longer.
An offshore transfer can bring an old tax question into a very current transaction. We recommend checking the history before committing the proceeds to a purchase outside South Africa, because an unresolved tax position can affect both the amount available and the transfer timetable.
The departure date needs some thought
Moving money between bank accounts you own does not, by itself, end South African tax residence. Moving to another country does not necessarily end it either.
South African tax residence depends on the ordinarily resident test, which considers whether South Africa remains your usual or principal home, or the physical presence test where applicable. A double tax agreement can exclude someone from South African tax residence if the agreement treats that person as exclusively tax resident in the other country. The answer therefore depends on your circumstances and the relevant treaty.
A permit to live in another country or a date entered on a form cannot do all of that work. The date reported to SARS needs to reflect the legal position, supported by what changed in your life. SARS also requires notification of a change in tax-residence status through its prescribed process.
The tax may relate to an earlier year
Section 9H of the Income Tax Act treats an individual who ceases South African tax residence as having sold and reacquired most assets at market value, even where no actual sale occurs. The deemed sale takes place on the day before tax residence ends. This can create a capital gain while the individual still holds the investment and has received no sale proceeds.
For example, assume ordinary investment shares have a base cost of R2 million and are worth R5 million on the relevant date. If section 9H applies, the deemed disposal produces a R3 million capital gain before applicable exclusions and losses. R3 million is the gain, not the tax payable. Transferring money several years later does not move that gain into the year of the transfer.
There are exceptions. South African immovable property held directly is excluded from this deemed disposal, although a later sale can still be taxable. Shares in a property-owning company need separate analysis.
The records should explain how the money arose
A bank statement proves that money arrived in an account. The documents behind the deposit explain whether the amount was sale proceeds, a dividend, an inheritance or repayment of a loan. Those descriptions can produce very different tax results.
SARS’ supporting-document requirements for Approval for International Transfer applications reflect that distinction. Depending on the source, the evidence can include sale agreements, investment statements, estate documents or loan agreements. SARS also asks for statements of assets and liabilities for the preceding three tax years in relevant applications.
For an investment sale, we recommend retaining the acquisition records and any valuation used when tax residence ended, alongside the sale statement. That allows the proceeds to be reconciled with the tax treatment across the relevant years. A loan repayment needs evidence of the original advance and the outstanding balance; the payment reference alone is unlikely to explain the transaction adequately.
Account information can prompt a question without proving tax is due
Under the Common Reporting Standard, participating jurisdictions exchange information about reportable financial accounts. Depending on the account, that information includes balances, investment income and gross sale proceeds.
Gross proceeds are not the same as a taxable gain. A report showing a R5 million disposal does not tell SARS what the investment originally cost or whether an earlier deemed disposal changed its base cost. Those details come from your records. We recommend keeping the tax-residence information held by your banks up to date so that their reporting reflects your circumstances.
Before instructing the transfer
We recommend checking the tax-residence date and supporting evidence, then reconciling the proposed transfer with the source documents and relevant tax returns. The bank or authorised dealer should confirm the exchange-control process and any SARS approval required for the particular transfer.
If the review identifies an omitted gain or income item, the appropriate correction or disclosure process needs consideration before an application is submitted. Transfer approval does not replace the tax analysis.
Regan van Rooy can review the tax-residence history and the treatment of the funds you intend to transfer, including any outstanding South African tax obligations. Contact us to discuss this in more detail.
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