Most South Africans living abroad will be aware of reforms to the so-called ‘expat tax’ introduced this year by the South African Revenue Service (SARS). Until March 2020, income earned in a foreign country by South African expats was not subject to South African tax providing certain conditions were met with regards to residency and time spent in South Africa, having noteworthy financial implications.
The amendment to the Income Tax Act, which was introduced in March 2020, removed the exemption of taxable income from foreign sources for South African expats, and as a result, many will be required to pay taxes to SARS.
The reforms have left many South African expats away from their home country, looking for legal tax mitigation advice and solutions to minimise the liability to their finances and investments. One option is financial emigration, but what is it, and is it the right advice to help you have better expat financial planning?
What is Financial Emigration?
Financial emigration is the process whereby a South African resident changes their status with the South African Reserve Bank (SARB) to non-resident for tax and exchange control purposes. It is a process that has become particularly attractive to South Africans seeking financial security, ease of travel, and safety from crime and political strife in their home country. Financial emigration is also favoured by many South Africans for capital preservation and is effective when done with careful planning.
There are numerous reasons for financial emigrants planning to move money out of their home country. South Africa’s long history of political and economic volatility, coupled with staggering levels of violent crime, are factors that have contributed to the high number of South Africans who have chosen to emigrate and become an expat. Financial stability is often a top concern for those emigrants seeking comfortable retirement or investment options for their money.
While many South Africans living abroad consider the possibility of financial emigration for easier wealth management and general financial planning, it is not the easy solution it might at first seem. Although it does not impact their citizenship, those who opt to utilise this strategy must sever all financial connections with South Africa. This process can be challenging, particularly for those who own property or maintain strong family ties in their home country.
In addition, it doesn’t always solve the problem of paying taxes because even if an expat opts for financial emigration, they could still be deemed a resident of South Africa. Therefore, while this process is a viable tax mitigation strategy for an expat, it is not the best advice for most cases. Financial emigration is a serious commitment and requires effective financial planning, which is very difficult to achieve without professional advice from experts and generally only recommended as a last resort.
What are the Benefits of Financial Emigration?
Financial emigration provides people with various benefits such as:
– Financial stability
Financial stability is improved with emigrating because of the various tax benefits and guarantees that other countries provide. Financial emigration enables you to have more effective planning to secure a better life for your family, whether in terms of education, living standards or finance. It allows you to give your children far better opportunities than if they had stayed in South Africa.
– Financial growth
You can achieve another benefit of financial emigration, financial growth, through the various taxable benefits that come with financial emigration, such as capital gains and share-based remuneration. Many experts can also help you out with advice regarding your financial decisions that are tailored specifically for your needs.
– An increased value of savings and investments
Financial emigration enables an expat to secure their future by investing their funds to guarantee a better return on their investments. This strategy also facilitates trade by ensuring that all assets flow freely across international boundaries without restrictions or tariffs.
Expat Financial Advice
For those looking towards financial emigration, making sure one’s investments remain healthy after moving is essential, whether or not you plan on retiring in a different country. You should seek out proper financial advice from an experienced financial adviser who understands your financial goals and risks to help you create a solid investment portfolio using investment management.
One of the pitfalls a retired expat could fall into is taking too much risk with their investments during the early years of retirement. They are often still full of energy and do not need to be overly concerned about short-term market fluctuations. Investing in a well-diversified portfolio that includes stocks from developed countries can provide steady income later in life when you might have less energy to recover from downturns.
Your financial adviser will be able to help you diversify your investments appropriately and manage cash flow by providing quarterly or annual reports on your investment portfolio for tax purposes.
Remember that an international retirement is never stable. There are always changes in currency values and different financial opportunities between countries, so keeping some of your assets back at home is advisable.
What Is Expat Financial Planning?
When structuring a comprehensive financial plan to reach and exceed your financial goals as an expat abroad, many factors and considerations come into play.
When living abroad, ask yourself if the new country has a lower cost of living or not. Consider how your average daily expenditure would differ and if you would have any disposable income to keep enjoying life when you live abroad. Moreover, currency exchange rates will also have financial implications regarding your stability in a new country.
That said, you will likely have a better idea of what your finances will look like after living abroad for a while. Beyond your basic and miscellaneous costs, there are a few common elements expats in different countries should consider:
A popular phrase states that the only two certainties in life are death and taxes. Although it may seem grim, it speaks the truth. Taxes play a vital role in any financial plan, and working abroad, whether for a company or as a self-employed individual, will inevitably affect your long term plan.
Your employer will likely provide you with tax requirements relevant to your situation, but it is always wise to get additional professional advice. Factors like your country of origin and the equalisation policies your employer may have, influence the tax you will have to pay. For example, US expats are required to report any bank accounts they opened in a foreign country according to the Foreign Bank Account Report.
Financial Planning for Comfortable Retirement
Retirement planning is an essential part of expat financial planning. Expat assignments will undoubtedly influence your long term goals regarding retirement in your country of origin and host country. Further technicalities may arise when you decide where you would like to retire.
Nobody likes to think about this aspect of financial planning, but the distribution of your assets, like money and property, will have a significant impact on your family and their finances after you’re gone. Death being the other certainty in life, wills are essential, especially if you work in a high-risk environment.
Expat wills in a new country could become quite technical, and a professional might offer advice that would have been difficult to gather on your own. Having a well-written will could save your family a world of trouble. Inheritance laws vary widely between countries and are definitely worth considering.
If you’d like to talk through financial emigration with experts and the other options available to you, do get in touch with us for expert advice based on your specific situation at email@example.com.
A leading provider of expat financial services and wealth management services across Asia.