Tax Benefits for Foreign Retirees in South Africa
Tax

Tax Benefits for Foreign Retirees in South Africa

Retiring in South Africa offers a host of advantages, from its beautiful landscapes and immaculate climate to a lower cost of living. One of the most compelling reasons, however, is the favourable tax conditions for foreign retirees.

This article will guide you through the key tax benefits that make South Africa an attractive destination for those looking to enjoy their golden years in a picturesque and economically advantageous setting. It is important to consider the requirements for immigrating to and applying for residence in South Africa for the purpose of Retirement or Permanent Residence.

Understanding Tax Residency in South Africa

Before diving into the specific tax benefits, it’s important to understand the concept of tax residency in South Africa as South Africa encompasses a residence-based tax system.

If you are considered a resident of South Africa for tax purposes you will pay tax on your worldwide income, whereas as if you are considered non-resident for tax purposes you will only pay tax on your South African “source” income and certain beneficial exemptions apply.

The South African Revenue Service (SARS) determines tax residency based on either physical presence or ordinarily resident tests.

  • Physical Presence Test: This test is based on the number of days you spend in South Africa over a period of six consecutive years. If you meet certain thresholds you may be considered a tax resident.
    • The thresholds are as follows (all three points below must be met):
      • 91 days in total during the year of assessment under consideration;
      • 91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
      • 915 days in total during those five preceding years of assessment
  • Ordinarily Resident Test: This test considers whether South Africa is your usual or principal place of residence. If you move to South Africa with the intention of making it your permanent home, you may be classified as ordinarily resident.
    • There is no statutory definition of ‘ordinarily resident’ but South African courts have held that a taxpayer is ordinarily resident if South Africa is
      • the country of their most fixed or settled residence or
      • the country to which they would “return from their wanderings” or
      • their usual or principal home.

Pension Income from Abroad

One of the most significant tax benefits for foreign retirees is the treatment of pension income from abroad. South Africa does not tax pension income earned outside the country if you are not considered a tax resident. The tax residency is key. If you tend to spend Summers in South Africa you may become a tax resident by default after six years, but until then your foreign pension can be received tax-free, which can be a substantial financial advantage.

However, if South Africa becomes your permanent retirement home and you become a tax resident then you will be taxed on your worldwide income.

Either way, it is important to know about the different types of taxes applicable to you as a foreign retiree who remains a non-resident visitor or becomes a South African tax resident.

Double Taxation Agreements (DTAs)

South Africa has double taxation agreements with numerous countries, designed to prevent the same income from being taxed twice. These agreements can further enhance the tax benefits for foreign retirees (resident or non-resident). DTAs typically provide relief by either exempting income from tax in one country or allowing a tax credit for taxes paid in another country.

For example, the DTA between South African and the United Kingdom allows for:

If your home country has a DTA with South Africa, you can benefit from reduced tax rates or exemptions on certain types of income and dependent on your residency status. It’s advisable to consult a tax expert from each country to understand how these agreements apply to your specific situation.

Capital Gains Tax (CGT)

Capital gains tax is another important consideration for retirees. In South Africa, CGT is levied on the disposal of assets. However, the tax treatment can vary based on your residency status.

If you are not a tax resident, CGT is generally only applicable to your South African assets, not your worldwide assets.

This can be advantageous if you own property or investments outside South Africa. By not being subjected to CGT on your foreign assets, you can better manage your investment portfolio and reduce your overall tax burden.

Estate Duty

Estate duty, or inheritance tax, is another aspect of South African taxation that can impact retirees. South Africa levies estate duty on the worldwide estates of residents and on South African assets of non-residents. The current estate duty rate is 20% on the first ZAR 30 million and 25% on the amount exceeding ZAR 30 million.

For foreign retirees who are not tax residents, estate duty is only applicable to assets located in South Africa. This limited scope can help in estate planning, ensuring that your heirs receive the maximum benefit from your estate.

Healthcare and Medical Expenses

Healthcare is a major consideration for retirees, and South Africa offers both public and private healthcare options. Medical expenses, including contributions to medical aid schemes, can be claimed as deductions on your tax return. This can help reduce your taxable income, providing additional financial relief.

For foreign retirees who are not SA residents and pay no tax in South Africa, this will not be a benefit as there will be no tax to deduct from. However, those foreign retirees who eventually become South African tax residents, joining a local medical aid scheme can ensure access to quality healthcare while also offering tax benefits.

Understanding the specifics of medical expense deductions can help you optimize your tax situation.

In addition to the different types of taxes that may be applicable to foreign retirees as mentioned above, there are also restrictions on moving money and out of South Africa.

Regulations About Bringing Money into South Africa

There is no Limit on Inward Transfers: Foreigners can bring any amount of money into South Africa. There are no restrictions on the amount of foreign currency that can be brought into the country, whether it be for investment, property purchase, or personal use.

Declaration Requirements:

When entering South Africa, if you are carrying cash (notes and coins) in excess of ZAR 25,000 (or the equivalent in foreign currency), you must declare it to customs upon arrival.

For larger transfers via banks, financial institutions will typically ask for documentation to ensure the funds comply with anti-money laundering regulations and are legitimate.

Regulations About Moving Funds Out of South Africa

  • Transfer of Investment Capital:
    • Foreign investors can freely repatriate capital and profits from investments in South Africa, provided that the original investment was reported to the SARB. Documentation proving that the funds were initially brought into the country must be presented when repatriating.
  • Standard Discretionary Allowance (SDA):
    • South African residents (including foreigners who have become tax residents) are allowed to take out up to ZAR 1 million per calendar year without requiring SARS tax clearance. This allowance can be used for travel, gifts, loans, and other expenses.
  • Foreign Investment Allowance (FIA):
    • South African residents are also allowed an additional ZAR 10 million per calendar year for foreign investment purposes, but this requires tax clearance from SARS.
      • The tax clearance certificate is known as an AIT (Approval for International Transfer). For further details of what supporting documents are needed for an AIT application please refer to this link:
      • Non-Resident Accounts:
        • Foreigners can hold non-resident bank accounts in South Africa, and funds in these accounts can generally be repatriated without restriction, as long as the original source of funds is documented.
      • Limits on Personal Transfers:
        • While there are no strict limits on how much foreigners can take out, large transfers may require SARB approval to ensure compliance with exchange control regulations.
      • Exchange Control Regulations
        • Non-Resident Status:
          • Non-residents (including foreign retirees) are not subject to South Africa’s exchange control restrictions, making it easier for them to move money in and out of the country compared to residents.
        • Reporting Requirements:
          • Banks and financial institutions must report significant transactions to the Financial Intelligence Centre to monitor for potential money laundering or other illegal activities.

For foreign retirees, understanding the above is crucial, especially if you plan to maintain financial ties or investments in your home country. Proper planning can help you make the most of your retirement savings while minimizing tax liabilities.

Practical Steps for Foreign Retirees

If you are considering retiring in South Africa, here are some practical steps to take advantage of the favourable tax conditions:

  1. Consult a Tax Expert: Engage with a South African tax expert who can provide personalized advice based on your financial situation and retirement plans.
  2. Understand Residency Rules: Familiarize yourself with the residency tests to determine your tax status and plan your stay accordingly.
  3. Review Double Taxation Agreements: Check if your home country has a DTA with South Africa and understand the benefits it offers.
  4. Plan for Pension Income: Ensure your foreign pension is structured in a way that maximizes tax benefits.
  5. Utilize the Foreign Investment Allowance (FIA): Manage your offshore investments and finances effectively.
  6. Estate Planning: Consider the impact of estate duty and plan your estate to minimize tax liabilities for your heirs.
  7. Healthcare Planning: Join a local medical aid scheme and understand the tax deductions available for medical expenses.

Conclusion

South Africa’s favourable tax conditions make it an attractive destination for foreign retirees. By understanding the tax benefits and planning accordingly, you can enjoy a comfortable and financially secure retirement in one of the world’s most beautiful and diverse countries. Engaging with a South African tax expert can ensure you make the most of these benefits and navigate the complexities of the tax system with ease.

Disclaimer:

The material and information provided are for general information purposes only and should not be used for making business, legal, or tax decisions without consulting a professional. Tax laws change regularly, and any tax information may be outdated if referring to this article at a future date.

Related Posts