More exit charge issues


Ceasing to be resident can have some harsh tax consequences, including potential double taxation despite the presence of a tax treaty. This article also examines the amendment to the annual exclusion in the Taxation Laws Amendment Act 20 of 2022.

The consequences of exiting while holding shares in a land-rich company

John owns shares in a resident company which holds his primary residence in South Africa as its sole asset. The base cost of the property is R1 million and its market value at the time of exit is R3 million. For the sake of simplicity, assume that the shares also have a market value on the date of exit of R3 million and a base cost of R1 million.[1]

John exits on 1 July 2023. At that time, he will be deemed under section 9H to have disposed of the shares for R3 million on 30 June 2023 and will be subject to CGT on a capital gain of R2 million (R3 million proceeds − R1 million base cost). If he is on the maximum marginal rate of 45%, the CGT will be R2 million × 40% inclusion rate × 45% = R360 000 (ignoring the annual exclusion).

The following should be noted:

First, despite the fact that the shares are held in a land-rich company which will remain potentially taxable after exit under paragraph 2(1)(b) read with paragraph 2(2), section 9H(4)(a) excludes from the exit charge 'immovable property situated in the Republic'. The term 'immovable property' does not extend to movable assets such as shares[2] in a land-rich company contemplated in paragraph 2(2) of the Eighth Schedule. Under paragraph 2(2), a non-resident is deemed to hold an interest in immovable property in SA if that non-resident holds, together with connected persons, an interest of at least 20% of the equity shares in a company and 80% or more of the market value of those equity shares at the time of their disposal is attributable directly or indirectly to immovable property in South Africa.

Section 9H was substituted with effect from 8 May 2012 by the Taxation Laws Amendment Act 22 of 2012 and at that time section 9H(4)(b) excluded from section 9H

'(b) any interest or right of whatever nature of that person to or in immovable property situated in the Republic, including an interest in immovable property contemplated in paragraph 2(2) of the Eighth Schedule;'.

However, section 9H(4)(b) was deleted by the Taxation Laws Amendment Act 31 of 2013 with effect from 12 December 2013. As I recall, one of the reasons for its deletion was National Treasury's concern that the fiscus would lose its taxing rights if the person emigrated to a country with a tax treaty[3] that did not contain the standard land-rich share clause (article 13(4) of the OECD Model Treaty):

​'4.   Gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting State if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property, as defined in Article 6, situated in that other State.'

Although SARS argues, somewhat optimistically, in its Comprehensive Guide to Capital Gains Tax (Issue 9)[4] that the absence of article 13(4) in a tax treaty is not an obstacle to it being able to tax shares in a land-rich company, in my experience most tax practitioners do not share its view.

As a result of the deletion of section 9H(4)(b), the exit charge will apply to shares in a land-rich company, the taxpayer will have to determine a capital gain or loss and then receive a step-up or step-down in the base cost of the shares. When the shares are subsequently disposed of by the non-resident, a further capital gain may have to be determined under paragraph 2(2) if the market value of the shares has increased from the time of exit and the tax treaty confers a taxing right on South Africa.

Let's say John wants to dispose of the shares to a third party after ceasing to be resident. Many potential resident buyers would not want the shares for at least two reasons. First, they would not be entitled to the primary residence exclusion because to qualify the residence has to be held in their own name,[5] and secondly, a buyer would be reluctant to take over shares in a company because of the danger of undisclosed liabilities.

John's other option is to sell the property to the buyer out of the company, pay the CGT in the company at an effective rate of 21,6% (27% × 80% inclusion rate), and distribute the after-CGT proceeds by way of a dividend to himself, which would attract dividends tax at 20% unless a tax treaty provides for a lower rate. The dividends tax works out at an effective rate of 15,68% (100 − 21,6 = 78,4 × 20% = 15,68%), making the cost of extraction 21,6% + 15,68% = 37,28%.

Assuming the property is sold for R3 million, the CGT in the company will be R2 million × 21,6% = R432 000. That leaves an after-tax profit of R1 568 000 which, upon distribution, will attract dividends tax at, say, 20% of R313 600. John's total tax bill is thus R360 000 + R432 000 + R313 600 = R1 105 600, which amounts to nearly 37% of the value of the property.

Had John originally acquired the property in his own name, he would have paid no exit tax under section 9H(4)(a), and the full capital gain of R2 million would have been disregarded under the primary residence exclusion in paragraph 45. This example exposes the folly of placing a primary residence in a company.

Ceasing to be resident while holding foreign immovable property


The problem of double taxation can also raise its ugly head when a person ceases to be resident while holding foreign immovable property. Let's say Jane holds a flat in London with a base cost of R1 million and a market value at the time of exit of R6 million. When she ceases to be resident, the flat is deemed to be sold for R6 million and, assuming she is on the maximum marginal rate, she must pay CGT on a capital gain of R5 million at 18% = R900 000. Let's say she then decides to sell the flat after exit. She will be subject to CGT in the United Kingdom but will receive no credit for the South African exit tax because the United Kingdom would not have triggered a disposal when she exited South Africa. Of course, the reverse situation would apply when a United Kingdom resident holding South African immovable property exits the United Kingdom and has to pay CGT in that country. South Africa will give no credit for the foreign CGT when the resident disposes of the South African property.

The annual exclusion and the proviso to paragraph 5(1)

The Taxation Laws Amendment Act 20 of 2022 introduced a proviso to paragraph 5(1):[6]

​'5.   Annual exclusion.—(1)  Subject to subparagraph (2), the annual exclusion of a natural person and a special trust in respect of a year of assessment is R40 000: Provided that where any person's year of assessment is less than a period of 12 months, the total annual exclusions for years of assessments during the period of 12 months commencing in March and ending at the end of February the immediately following calendar year must not exceed R40 000.'

The draft Explanatory Memorandum on the Taxation Laws Amendment Bill, 2022 points out that persons ceasing to be resident have two years of assessment during the 12 months ending on the last day of February, since section 9H deems their year of assessment to end on the day before exit. Since the annual exclusion is per year of assessment, it is unacceptable from a policy point of view to grant two annual exclusions during the same 12-month period.

What the EM ignores is the fact that when persons cease to be resident, all their assets, barring a few exceptions, are deemed to be disposed of, thus resulting in a bunching effect, similar to what happens when a person dies. By rights the annual exclusion should be increased to cater for this effect but presumably the fiscus is not going to be kind to anyone parting the country for greener pastures. It is surprising that the fiscus would concern itself with a trivial amount like this, since the annual exclusion is worth a maximum of R7 200 (R40 000 × 18%).

So how does the proviso work? Assume a person exits on 1 July 2023 and the sum of their capital gains is R30 000 for the period up to and including 30 June 2023. In the second period (1 July 2023 to 29 February 2024), the person sells immovable property in SA and realises a capital gain of R60 000. In the first year of assessment, the capital gain of R30 000 must be disregarded as it is less than the annual exclusion. In the second year of assessment, the annual exclusion must be reduced by the portion used in the first period, leaving R10 000 available for set-off against the capital gain of R60 000 in the second period.

But what happens if there is a capital loss of R40 000 in the first period and a capital gain of R60 000 in the second period? It would seem that the capital loss of R40 000 must be disregarded in full and in the second period the full amount of R60 000 must be brought to account because the annual exclusion was fully used in the first period. This outcome seems unfair because if the taxpayer had a single year of assessment, the capital loss could have been set off against the capital gain, leaving R20 000 which would have been reduced to nil by the annual exclusion. Even before the proviso, the taxpayer would have been able to disregard R40 000 of the capital gain of R60 000, leaving a capital gain of R20 000 to be brought to account.

It seems the drafter did not factor in that an annual exclusion applies to both gains and losses. It would have made more sense to restrict the proviso to situations in which there are capital gains or capital losses in both periods.


The exit charge in section 9H can result in double taxation because no tax credit is likely to be available in the destination country.

Tax practitioners should be aware of the limitation of the annual exclusion when their clients cease to be resident and continue to have capital gains in the period immediately following their departure.

This article was first published in ASA March 2023

[1]     In practice, the shares may well be worth less because of the contingent liability for CGT on the property and dividends tax on undistributed reserves.

[2]     Section 35 of the Companies Act 71 of 2008 confirms that a share is movable property.

[3]     For example, Luxembourg.

[4]     In paragraph 4.2.

[5]     See the definition of 'an interest' in paragraph 44, which does not include shares except shares in a share block compan 

[6]     ​​The proviso comes into operation on 1 March 2023 and applies in respect of years of assessment commencing on or after that date.y.​​


Webber Wentzel > News > More exit charge issues
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