The journey and adventure for your child studying abroad can be a learning experience not just for your child but also for you as a parent. While studying or living abroad is fertile soil for so many positive things, the complexities of administration relating to this relocation cannot be understated.
The tax and exchange control considerations of studying abroad should be considered before your child relocates abroad. In this article, we will discuss the tax and exchange control implications when providing funds to your child abroad. As well as the implications of their “move abroad” on their tax residency status in South Africa
What if my R1 million annual discretionary allowance is not enough to cover my child’s tuition fees and living expenses?
When it comes to paying your child’s tuition fees, exchange control regulations make provision for you to pay the relevant offshore institution directly from South Africa on the back of an invoice. This payment will not fall within your R1 million allowance. Also remember that if your child is over the age of 18, you can transfer rands to their bank account in South Africa and your child can utilise their own R1 million allowance to externalise funds and pay for tuition fees and living expenses.
If you already have legitimate offshore funds, you may now donate, lend and/or transfer any legitimately externalised offshore funds to your child (regardless of their exchange control status). However, this is subject to tax compliance in South Africa. Note that this was not necessarily the case pre-February 2022.
What are the tax consequences of transferring funds to your child?
As a South African tax resident, you can provide funds to your child without incurring donations tax (levied at 20% or 25%) in terms of section 56(2)(c) of the Income Tax Act. This section provides a donations tax exemption for so much of any bona fide contribution made by the donor towards the maintenance of any person that the Commissioner considers to be reasonable. If the funds provided to your child do not constitute reasonable maintenance, be aware that you may be liable for donations tax on the amount donated.
As an alternative, you could advance funds to your child in terms of a loan agreement, and whether you charge interest or not would depend on your child’s tax residency status (read more on what to consider when donating or lending funds in an earlier article by clicking here).
What is my child’s tax status?
From a tax residency perspective, the mere fact that your child is going to study abroad would not automatically lead to the cessation of their South African tax residency, unless this relocation is permanent with no intention of coming back to South Africa.
The next aspect to consider is whether your child may unknowingly trigger tax residency in their new country of residence in terms of that jurisdiction’s domestic laws.
In certain countries, the days counting for the tax residency clock starts ticking the moment you arrive, even though your child may only be in that country to study. This would mean that your child may be considered a tax resident in a jurisdiction other than South Africa in a matter of months. In other countries, for example, your child may only be considered a tax resident once they start working in the country. As these considerations are very subjective and jurisdiction-specific, it is important to always assess and reassess your child’s facts and circumstances with suitably qualified tax advisors.
If your child is considered a dual tax resident under South African law and the domestic law of the new country of residence, it would be important to ensure that their tax returns are submitted appropriately in both jurisdictions. In most cases, your child as a worldwide South African taxpayer will obtain credit for any foreign taxes paid.
On the other hand, once your child’s relocation becomes permanent and he/she starts putting down roots in another country by getting a job or marrying their Ivy League sweetheart, it would be important for them to follow the correct process of ceasing South African tax residency.
The process of ceasing tax residency can be done on eFiling and if your child is not registered on eFiling, they could follow the manual process by emailing SARS. Importantly, ceasing tax residency in South Africa triggers a capital gains tax event (also known as the ‘exit charge’). Essentially, your child will be deemed to have disposed of their worldwide assets (excluding inter alia cash, personal use assets, and fixed property in South Africa) at market value. Once this tax liability has been settled and your child has obtained a notice of non-South African tax residency status, they will be able to externalise their assets, should they wish, by applying for a tax clearance status PIN via the e-filing process now called the Approved International Transfer process.
As a non-South African tax resident, it’s important to ensure that tax returns are appropriately filed for any South African-sourced income moving forward. For beneficiaries of South African trusts, it’s vital to obtain tax advice before ceasing tax residency as it is often the case that a South African trust no longer proves viable for non-resident beneficiaries. Lastly, it would also be remiss for your child to neglect to update their estate planning to cater for the change in circumstances.
In summary, we do not have a crystal ball to determine where our children may elect to settle at the end of the day. The important aspect is to get advice when there is a change in circumstances and amend your planning accordingly.
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