Cross Border Inheritance
My relative has died in South Africa and I am a beneficiary of his/her estate. This article will deal with the issue of inheriting while overseas.
As is the case with a global economy enabling opportunities to live and work abroad, many South Africans have embraced an adventurous spirit and have undertaken the long trek across borders with their children and pets in tow. Some in search of exploration and others for a better life.
Some of us can relate to this ourselves, or at the very least, have friends and family members who are currently undertaking the adventure in the ever-popular Australia or Canada.
Everyone has a cousin in Australia by now….
Often we have had to give our parents long hugs at airports amid tears and promises to visit. Heart breaking with some of us realising that it may be the last time we see our parents.
Life (and finances) being so unpredictable, who knows when (for certain) that visit will be?
Take 2020 for example. No one could have foreseen the devastation that COVID-19 wrought (and continues to wreak) on the world. None of us could have predicted that upon leaving South Africa in 2018 or 2019 (or earlier) that we would not be able return in 2020 (and now 2021). And that has unfortunately, had devastating effects. Many of us have lost our parents due to COVID. With them in South Africa and us in other parts of the world (and unable to travel), we have not been able to attend funerals, forced to grieve from afar.
The result? We have had to deal with the devastating loss of a loved one away from family and friends but also having to deal with the complicated issue of cross-border inheritance (and all that it entails).
As if the long distance grieving wasn’t bad enough.
The sad reality is that we lose our parents every day, simply because it was their time. And whatever the situation, we can all relate (on some level) to the universal concept that is inheritance and the grieving that goes along with it.
But what makes the current discussion of inheritance more complicated (both from an emotional perspective as well as from a situational perspective) is the issue of inheriting while overseas.
It’s never easy. And you don’t always know which way to turn. But we are here to help you.
So, let’s talk about some of the issues you may face when dealing with an inheritance whilst living broad…
Tell us about the process of emigration in 2021
In January 2021, the Taxation Laws Amendment Act 23 of 2020 was signed into law and effectively did away with the distinction between residents and non-residents for exchange control purposes. And therefore in essence, did away with the process of financial emigration. Financial emigration previously occurred when a person had been granted permanent residency abroad and involved formally informing and changing their residency status with the South African Reserve Bank (“SARB”). It only occurred for exchange control purposes i.e. it did not affect citizenship status in any way (meaning one could still hold a SA passport).
Wait. What does exchange control mean?
Wikipedia defines exchange controls as –
“various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents, on the purchase/sale of local currency by nonresidents, or the transfers of any currency across national borders”.
But in his February 2020 Budget Speech, the South African Minister of Finance, Tito Mboweni, announced various relaxations to the existing exchange control regime, including the phasing out of the concept of emigration as recognised by the Financial Surveillance Department of the South African Reserve Bank (FinSurv) i.e. the process previously referred to as financial emigration.
With effect from 1 March 2021, South African exchange control residents no longer need to formally apply through FinSurv for approval upon emigration. But what they will need to do is obtain a Tax Compliance Status (TCS) issued by the South African Revenue Services (SARS) which confirms that the emigrant has ceased to be a resident for tax purposes. An emigrant will have to complete a SARS TCR01 ‘Emigration’ application form in order to receive a TCS. If no TCS is obtained, it will inhibit an emigrants Authorised Dealer (i.e. their bank) to transfer funds offshore. A TCS will only be issued in respect of tax compliant taxpayers of 18 years or older.
What is involved (briefly)?
Emigrants who cease to be tax residents and who transfer less than R 1 million per individual per calendar year, will not require a TCS;
Emigrants who cease to be tax resident and who transfer between R 1 - R 10 million abroad, will not be able to have the funds remitted offshore without a TCS;
Emigrants who cease to be tax resident and who transfer more than R 10 million will be subject to a stringent verification process by SARS and an approval will be required from FinSurv. The intention is to perform a risk assessment in terms of the anti-money laundering and countering terror financing requirements as prescribed in the Financial Intelligence Centre Act 38 of 2001;
All transfers of assets by an individual who ceases to be tax resident will be transferable. For example, payment of lump sum benefits upon the withdrawal of retirement funds will only be allowed by Authorised Dealers if the individual has remained non-tax resident for at least three consecutive years;
Natural person emigrants and natural person residents will be treated the same. The concept of a ‘blocked funds account’, through which an emigrant’s remaining assets were controlled, will fall away:
a) income and capital distributions from inter vivos trusts may be transferred abroad; and
b) pre-inheritance gifts may be transferred abroad.
In all of the above instances, the remittances will be subject to tax compliance. Also, where the transfer is for more than R 10 million, the stringent SARS verification process and FinSurv approval will apply.
While the above has some benefits by doing away with the outdated legislation around exchange control, it has resulted in a more complicated treatment of tax residency, often making it more difficult for non-residents to actually prove their non-residency status (SARS obviously playing a more active role in enforcing the rules when a person seeks to transfer funds abroad).
What is tax residency?
Tax residency in South Africa essentially boils down to ‘physical presence’ and the ‘ordinarily resident’ tests. Not physically living in South Africa does not automatically result in you not being a tax resident of South Africa. This is incorrect and an oversimplification.
So how do you go about determining your tax residency?
The ordinarily resident test is relatively subjective. You'll usually be seen as ordinarily resident if your permanent home (to which you normally return) is in South Africa. However, the courts have held that anyone considered ordinarily resident includes:
a) Those living in a place with some degree of permanence;
b) Those with a permanent home;
c) Those who have their belongings stored, and
d) Those who regularly return to a place following temporary absences
If you are able to prove the contrary to be true, SARS will recognise that your intention is not to be a South African tax resident but that it is to reside elsewhere permanently.
The physical presence test - is entirely time-based and is only applicable to someone who was not at any stage during the relevant tax year considered being ordinarily resident in South Africa. It’s important to take note of the number of days spent in SA (especially if you are trying to show you no longer want to be a SA tax resident). To be deemed tax resident, you will have to have been physically present in South Africa for a period, or periods, exceeding:
a) 91 days in aggregate during the tax year under consideration;
b) 91 days in aggregate during each year of the five tax years preceding the tax year under consideration; and
c) 915 days in aggregate during the above five preceding tax years.
Note - There is a difference between being a SA tax payer and a SA tax resident -
A “SA tax payer” is someone who has to pay or disclose income streams in South Africa, regardless of whether they are a tax resident of SA or a non-tax resident of SA (earning SA sourced income). A non-tax resident only pays tax on their South African sourced income and South African sourced asset base. Whereas, a “SA tax resident” is someone who has to pay tax on their worldwide income and worldwide asset base in SA.
Discretionary allowances
What if you have not, as yet, gone through the formal emigration process as detailed above?
A discretionary allowance may be applicable.
If you still have access to your South African green barcoded or new smart card ID, and are therefore considered (in the ordinary course) to be a resident South Africa taxpayer, you are permitted to externalise funds (i.e. an annual allowance) of up to R11 million per calendar year – which includes a R1 million single discretionary allowance plus a R10 million foreign investment allowance – in direct offshore investments in foreign currency denominated assets. However a SARS tax compliance status verification result must be obtained and provided to an Authorised Dealer (bank) before the funds can be transferred offshore.
While your R1 million single discretionary allowance does not require tax clearance, you will still need to obtain tax clearance from SARB to move your foreign investment allowance offshore. To qualify for these allowances, you must be a South African resident over the age of 18 with a green bar-coded ID or smart ID and have a South African income tax number.
To apply for your tax clearance, you can download the FIA001 Tax Clearance Certificate application from SARB, keeping in mind that your tax returns must be up-to-date and you must be in good standing with SARS.
Do any taxes become applicable?
In our article Death and Taxes, we set out that In South Africa, there is no tax payable by a beneficiary on assets received from an inheritance.
All relevant taxes are paid by the estate of the deceased person as Estate Duty, which currently amounts to a rate of 20% on the first R30 million and at a rate of 25% on the dutiable value of the estate above R30 million. When the final figure of Estate Duty is determined, it is normally the responsibility of the executor of the deceased estate to pay the tax over to SARS before the remaining funds are paid over to the beneficiaries. After this, there is no longer any tax due.
But there may still be a tax the heir will have to pay on their inheritance in the country they are residing in. And this is where double taxation becomes relevant.
Double taxation
Double Taxation Agreements (“DTA”) exist between South Africa and a dozen other countries (of which the US and UK is a party). The DTA’s (which are internationally agreed legislation) ensure that a taxpayer is not unfairly taxed in both South Africa and the corresponding country. It provides a defence to double taxation and will determine where you must pay taxes on income received. This will includes taxes on inheritances.
A DTA becomes relevant if you are earning an income in South African as well as abroad, or if you are a tax resident in South Africa (but have no income from a South African source) and you are earning income from a foreign source. This type often gives rise to confusion as to where you can or should be taxed, especially taking into account that a South African tax resident is subject to tax in South Africa on their worldwide income.
We therefore suggest that professional guidance be obtained when dealing with double taxation to ensure that you are not being unfairly taxed on income received from an inheritance in South Africa and in the country where you reside.
We understand the complexities. And the frustration!
It is a lot to take in. We know.
Not being present while you grieve your loss (far away from family and friends). Being so bamboozled by all the complexities that come with inheriting whilst overseas, coupled with all the confusing information - you don’t know which way to turn! It’s understandable and we can empathise. Wholeheartedly.
And while the above information should not be considered as legal advice (as it simply does not cover all the various complexities and important considerations that need to be taken into account), we implore (and encourage) you to get in touch with the attorneys at Benaters who are not only fully acquainted with cross-border inheritance, but who are also able to understand what you are going through. You do not need to go through this alone and feel overwhelmed. Especially when you are far from home.
Contact us today and allow us to assist you during this difficult time with a helping (and understanding) hand, which you will undoubtedly need – we are here for you!
Written by Alicia Koch on behalf of Benaters