Ceasing South African Tax Residency: Understanding the Tax Implications for Emigrants

As increasing numbers of South Africans consider emigrating for lifestyle, security, career, or financial reasons, many overlook the significant tax implications of formally ceasing South African tax residency. For individuals with substantial local and offshore assets, understanding the tax consequences is crucial to avoid unexpected liabilities — including potential double taxation.

The “Exit Tax” Explained

The most immediate and often costly result of ceasing tax residency is the imposition of Capital Gains Tax (CGT), commonly known as the “exit tax.”
Under Section 9H of the Income Tax Act (ITA), an individual is deemed to have disposed of all worldwide assets (subject to certain exclusions) the day before they cease to be a South African tax resident.

The rationale is that while the individual was resident, they benefited from South Africa’s public infrastructure and services and must therefore settle tax on accrued capital gains up to the point of departure. Once non-resident, only South African-sourced income remains taxable in South Africa.

Assets typically subject to the deemed disposal include:

Unlisted company shares
Listed shares and bonds
Shares in South African immovable property companies
Foreign immovable property
Vested interests in the assets of a local trust

Assets excluded from the deemed disposal:

South African immovable property
Interests in approved South African retirement funds
Assets linked to a permanent establishment in South Africa
Certain employee share incentive schemes (Sections 8A, 8B, or 8C of the ITA)

The capital gain is calculated as the difference between the market value of assets on the date of deemed disposal and their base cost, with an effective maximum tax rate of 18% (assuming a top marginal rate of 45%).

Double Taxation Risk on Foreign Property

Individuals who own foreign property must exercise caution when emigrating to a jurisdiction that also levies capital gains tax. A double taxation risk arises because:

South Africa taxes the deemed disposal of the foreign property at market value the day before tax residency ceases; and
The foreign jurisdiction taxes the actual capital gain when the property is ultimately sold, using the original base cost (typically without recognising South Africa’s stepped-up base cost).

Because no actual sale occurs at the time of ceasing residency, no foreign tax credit can be claimed under Section 6quat of the ITA. Likewise, Double Tax Treaties (DTTs) generally offer no relief, as the deemed disposal takes place while the person is still a South African resident — preserving South Africa’s taxing rights.

As a result, the same capital gain may be taxed twice: once in South Africa upon exit, and again in the foreign country upon sale. This legislative gap effectively penalises individuals for ceasing residency, often leading to a higher overall tax burden than if they had sold the asset while still resident.

Formalising Non-Resident Status

Simply leaving South Africa does not automatically terminate tax residency.
If an individual fails to formally cease residency, they remain liable for tax on their worldwide income in South Africa.

During the year of emigration, a taxpayer may hold dual tax status — resident for part of the year and non-resident for the remainder. The final tax return (ITR12) must therefore:

Reflect the change in residency,
Include all worldwide income earned up to the date of cessation, and
Report and settle any exit tax arising from deemed disposals.

To be recognised as a non-resident, an individual must demonstrate to SARS that they are no longer ordinarily resident in South Africa or are exclusively tax resident in another country under a Double Tax Agreement (DTA).

Determining ordinary residence:

This is a factual assessment based on objective evidence supporting the individual’s intention to permanently leave South Africa and no longer regard it as their home. Where this is established, the change in tax residency takes effect from the date the individual left with the intention not to return.

For individuals who are residents under the physical presence test, tax residency ceases once they have been physically outside South Africa for a continuous period of at least 330 full days. In this case, residency is deemed to have ended on the date they left South Africa.

SARS formalities:

The cessation process involves updating the RAV01 form on SARS eFiling with the relevant date and providing comprehensive supporting documentation to evidence permanent relocation or exclusive tax residency abroad under a DTA.

The Importance of Professional Advice

The decision to cease South African tax residency carries significant financial and compliance implications. The process is complex, and the cost of missteps can be substantial.

Engaging professional tax advisors ensures:

Correct application of residency rules,
Accurate calculation and reporting of exit tax, and
Structuring of the emigration process in a tax-efficient and compliant manner.

Proactive planning can make the difference between a smooth transition and an expensive surprise.