(This article was last updated on January 1, 2022).

Introduction

What are the best investment options for South African expats in 2021 and what is the new expat tax? That will be the topic of today’s article.

In other articles, I have written about expatriates investing in both their local and home economies.

This has covered British, American and Canadian expats, among others, but what about South Africans?

Bear in mind that I am not a tax advisor, and this therefore shouldn’t be considered formal tax advice, although I do have plenty of knowledge about how taxes and investments go together.

In the first part of this article, I’ll lead you through what you need to know about the South African tax regime if you are a citizen of the republic living and working overseas.

The next part of the article will focus on the sort of investment opportunities you can take advantage of as a South African expat.

After all, plenty of South Africans make their living in other countries.

According to recent census data, the largest number of South Africans living overseas reside in the UK, followed by a similar number in Australia. After that, it is the United States, New Zealand and Canada that has the greatest populations of expats.

That said, you can find a South African community in most EU states as well as across Africa, with Namibia, Swaziland and Malawi being significant examples of countries where numerous expats live.

Regardless of where you live, as a South African citizen, you need to know how the tax laws will affect you if you retain assets at home or want to return to your homeland in the future.

If you want more personalised advice on tax and investments as a South African expat, then don’t hesitate to email (advice@adamfayed.com) or WhatsApp me.

South African Tax Changes in 2020

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Firstly, it is important to note that significant changes were made to the tax regulations in South Africa earlier this year. Although the Income Tax Act has been fully enacted for a while, an amendment to the 2017 law came in as recently as March.

Some South African expats I have talked to have been working under the misunderstanding that the law has stayed the same but it has not.

The 2020 amendment means that the South African Revenue Service (SARS) will now operate differently in its dealings with many expats.

So, what is going on? Firstly, the amendment is designed to harmonise the tax regime for South Africans working at home with those working overseas.

It will impact on any expatriate earning over a million rand a year, that’s about £45,000 or $60,000.

Before the rule changes, any South African who spent a minimum of 183 days outside of the country a year – so long as this included at least on continuous 60-day period – was not liable to pay income tax in the country.

In essence, this tax exemption has been removed in law. Expats are now considered to be South Africans in terms of the tax issue even if they have lived overseas for years.

Anyone who has familial links at home or who owns property they want to return to one day will, consequently, be liable for tax at home, too.

Double Taxation Agreements

Many South African expats will rightly feel that they are being caught out twice by the tax regime at home as well as the one in their adopted country.

British citizens working overseas but who remain ‘domiciled’ in the UK for the purposes of tax can face the same issue.

Nevertheless, South Africans, like their British counterparts, may be able to avoid paying tax on their overseas earnings and then stumping up once more to SARS.

This is because a number of countries have so-called double taxation agreements with South Africa that aims to prevent this.

Navigating your way through the double taxation system is not easy and you may need professional help, something I can assist with. Bear in mind, too, that not all countries operate the same system and some don’t take part at all.

For example, there is a multi-lateral agreement that includes the likes of Australia, the UK, the UAE and Switzerland. However, individual arrangements are in place for countries like India, Namibia, New Zealand or Oman.

Countries where there is no double taxation arrangement – or where one has yet to be finalised – include Vietnam, Senegal and Germany. Anyone working in such locations could face twice their usual tax liability if they earn over the threshold.

This could feasibly mean needing to come home because an overseas lifestyle becomes economically unsustainable.

Legal Expatriate Tax Exemptions

It is possible to avoid the new tax regime in South Africa. Firstly, earning beneath the threshold will mean it does not apply.

However, it is not just based on earnings – things like flights, school fees and housing provision are calculated as part of your taxable income if they are provided as perks by your employer.

The other main option open to expatriates is to declare themselves as financially independent of South Africa. This means no longer being considered an ordinary resident of the homeland and, therefore, outside of SARS’ jurisdiction.

You retain citizenship and your passport if you go down this route but it means not being able to take advantage of all the rights you would otherwise retain.

Furthermore, if you have assets in South Africa still, then this sort of financial divorce with the state means that you will be liable to pay capital gains tax on them.

To put it simply, becoming a financial emigré will benefit some expatriates but not others so it is not a decision to take lightly without weighing up all of the possibilities.

Limiting Tax Liability – Leveraging Investments

Another approach I’d advise at least considering is to look at limiting the amount of tax you might need to pay by making the right sort of structural investments.

This can be of benefit to you from the point of view of tax in your adopted country as well as at home.

For example, it is possible to set up an offshore company in a state with a low tax regime or to invest in a fund held in one.

There are plenty of laws to negotiate if you go down this route to ensure it is legal but it is something worth looking into, especially if the alternative is paying tax in two countries, not just one.

Something that is often considered more practical by expatriates from numerous different countries is to set up an investment portfolio that is part of an international retirement plan.

South African expatriates can do this to minimise their income tax declaration while also making their capital gains tax as low as possible on the lump sum that has initially been invested.

However, it is only when you have the right investment structure that you will become exempt from paying tax on the interest you earn.

Again, this is a field where my expertise can be invaluable to South Africans working overseas, especially when they want to retain a tax-efficient lifestyle at the point in their lives when they choose to return home.

Let’s take a look at the sort of investments that will be of particular interest to South African expatriates who are looking for practical and legal ways to lower their tax liabilities.

Investing In Your Adopted Country

Many people living and working overseas will have already made a personal investment in their adopted country, such as building a career or raising a family.

If that applies to you, then a financial investment in the country will also make sense even if you plan to realise that investment before returning home.

In the UK, for example, there are many tax-incentives to invest locally as a resident.

There again, access to stocks and shares via the globally leading exchanges in London or New York will make a great deal of sense to anyone living in either of those two countries.

For South Africans living in Australia, there are numerous investment opportunities, too, such as putting money into an equity fund, either through an offshore mechanism or through a local broker.

Of course, these sorts of investments require careful consideration before you throw yourself into them.

Firstly, you need to consider your attitude to risk and what you can afford to lose as well as the gains you are seeking. Then, there are specific issues that expats have to factor in. This includes how rapidly such an investment could be liquefied if you needed to return home sooner than expected, for example.

You might also want to consult an expert about whether a longer-term investment in your adopted country will continue to work for you after you have repatriated. Some will and some won’t, so good advice in this area is crucial.

In terms of tax, some types of investments held overseas are regarded as passive.

This means that they won’t necessarily form part of your tax bill. Dividends from shares are likely to be considered taxable by SARS but rental income from properties you own overseas usually won’t be, especially if you have already declared such income locally to the tax authorities there.

If you are an expat moving from country to country, a portable “third country solution” is often better than focusing on investing in your current country of residence.

Offshore Bank Accounts

In the main, I advise expatriate communities anywhere in the world to avoid using third-country bank accounts merely as investment vehicles. However, holding your liquid assets in them can be advisable, especially if your work means that you don’t settle in the same country for long.

The reason for this is that your banking provider will soon recognise that you are constantly on the move, living in country after country, and this means that it can be much less of a headache depositing your earnings and drawing on them when you need them.

Opening and closing bank accounts in each country you live and work in is a hassle you can avoid by using a reputable banking establishment in another country.

Retirement In South Africa

Many South African expatriates who work at least part of their career overseas will want to return to their homeland at some point, usually to retire. However, expats must decide how to manage their South African pension pot, specifically their retirement annuity funds.

The basic rule is that pension funds are subject to Regulation 28 in South Africa. This means that there is a limit placed on the proportion of the fund that can be exposed to offshore investment. At the moment this stands at 30 per cent.

Although this is not much of an issue for South Africans working at home who are planning for their retirement, it can be a problem for expats working overseas, especially those paying into company pension schemes over which they have little control.

One approach is to go down the financial emigration route to bypass the regulations but, as mentioned before, this will not suit everyone. Therefore, another way forward would be beneficial, such as swapping retirement fund annuities.

Since annuities are not subject to Regulation 28, it is possible to use a financial swap mechanism to convert them. Annuities are covered under the Insurance Act which means that they can be invested without the aforementioned offshore proportion limitation.

By creating an annuity offshore portfolio that is tailored to your needs. As such, you can invest for retirement in a currency that suits you and that matches your attitude to risk. If such an investment appeals to you, whether or not you are thinking about retiring in the near future, then do not hesitate to contact me.

For further information on investments that will suit the new tax regime affecting expatriate South Africans, email me at advice@adamfayed.com.