Olim face a ticking tax time bomb

This week, another full plane of South African olim touched down at Ben Gurion Airport. It follows more than 550 people who made aliyah last year, the largest number in decades.

Changing countries is a stressful and admin-intensive exercise. Though most of the process around aliyah is well understood, the South African tax requirements seem to be a major knowledge deficit.

A recent study by a private wealth manager in Israel has revealed that many South African olim have neglected to change their tax residency status with the South African Revenue Service (SARS). This oversight could have serious financial implications. For many years, these taxpayers have been able to remain below the radar. However, with the widespread sharing of financial information by revenue authorities around the world, those days are over. Rectifying the situation with SARS is required before it closes in.

Where you are tax resident matters

South Africa operates a residence-based system of tax. Consequently, South African tax residents are required to pay tax on their worldwide income and capital gains. Ceasing to be a South African tax resident will also trigger an exit charge.

Unbeknown to many, changing your physical residency or citizenship doesn’t automatically change your tax residency. Determining your tax residency and the timing of any changes is complex. It requires understanding Israeli and South African tax law, the double-tax agreement between the two countries, and will depend on the taxpayer’s unique circumstance. Numerous factors such as where you have a permanent home, your social and economic ties, and the time you spend in a particular jurisdiction all need to be considered.

SARS requires taxpayers to submit proof formally of a change in tax residency status. Failure to do so may result in significant back taxes, penalties, and interest.

SARS is now honing in on ex-South Africans, even those who left many years ago, who haven’t officially tax emigrated. The introduction of common reporting standards globally has resulted in tax authorities and international financial institutions sharing information about taxpayers. When SARS is alerted to foreign income earned by an ex-South African with an inactive or incorrectly coded tax number, SARS can raise an assessment on this undeclared income at any time.

Benefits of tax emigrating

After officially tax emigrating from South Africa, only South African source income and capital gains will be subject to tax in South Africa. Consequently all foreign income and capital gains won’t be taxed in South Africa. There are also generous exemptions for dividends tax, interest, and capital gains on South African shares for non-residents.

Another important benefit is that cashing out of South African retirement savings can be tax free due to the favourable double-tax agreement between Israel and South Africa. Surprisingly, given the financial risks in South Africa, international research has shown that the vast majority of ex-South Africans haven’t withdrawn their retirement savings after emigrating. This presents a big opportunity for those who haven’t yet done so.

How to rectify your situation

Former South Africans who haven’t yet officially tax emigrated should do so sooner rather than later, and while they still can. Currently, SARS offers a voluntary disclosure programme through which tax emigration can be backdated and potential penalties on exit charges avoided. This generous remedy isn’t available if SARS has already identified a violation.

Another concern that makes doing so urgent is that there’s speculation among tax practitioners that SARS is seeking to remove the ability to “backdate” a tax emigration. This could result in much higher exit charges, back taxes, interest, and penalties for former South Africans going forward.

Consulting a South African tax professional is vital to help you backdate your tax emigration without penalties, pay exit tax on the asset base you had when you left South Africa, and make sure you’re in good standing with SARS. But we don’t know how long this will remain possible.

• Michael Kransdorff is a Harvard educated international tax practitioner and Laura Sassoon is a Chartered Accountant and former senior lecturer at the University of the Witwatersrand.