According to data published by Statista, a German company specialising in market and consumer data, a cumulative amount of approximately 915 000 South Africans emigrated from South Africa as of 2020. Based on experience, there has been a noticeable increase in individuals seeking tax advice in connection with emigration over the past couple of years.
In terms of South African tax law, an individual can either be regarded as ordinarily resident or resident in terms of what is known as the physical presence test.
The Income Tax Act does not define “ordinarily resident” however the courts have interpreted it to mean the country to which a person will naturally and as a matter of course return after his or her wanderings.
To meet the physical presence test, the individual must not at any time during that year of assessment be ordinarily resident, must be physically present in South Africa for a period or periods exceeding 91 days in total during the year of assessment under consideration, and 91 days in total during each of the five years of assessment preceding the year of assessment under consideration, and 915 days in total during those five preceding years of assessment. An individual who meets the physical presence test but spends a continuous period of 330 full days outside of South Africa, will cease to be a tax resident from the day the individual ceased to be physically present in South Africa.
The following are common scenarios that raise tax residence implications for individuals considering emigration:
- An individual or family that is ordinarily resident in South Africa has made a firm decision before they leave the borders of South Africa on a one-way ticket, to never return to South Africa in pursuit of better economic and social opportunities.
- An individual or family that is ordinarily resident in South Africa leaves South Africa, however it takes time to settle in the new country before making a firm decision regarding whether to leave South Africa permanently or not.
- An individual or family that is ordinarily resident in South Africa is considering leaving South Africa permanently however, a firm decision will depend on the costs involved including the tax implications thereon.
- An individual or family that is ordinarily resident in South Africa currently lives and works abroad as an expatriate. However, over time, personal and or economic opportunities may arise including for example remote work for a South African employer, motivating the individual to remain in that foreign country indefinitely.
- A non-resident becomes a South African tax resident by virtue of meeting the physical presence test and after a period, is no longer required to be in South Africa and remains outside of South Africa permanently.
As simple as your situation might appear to be on the surface, ceasing to be a tax resident in South Africa is not as straightforward as picking a date and informing SARS that you are no longer tax resident in South Africa as of that date.
South Africa and many other countries adopt a worldwide basis of taxation and residents are taxed differently to non-residents. In South Africa, residents also have different tax compliance obligations to non-residents in terms of a Government Gazette notice issued by The National Treasury annually. Therefore, it is important to know your tax residence status to ensure that you are being taxed accordingly and fulfilling all your tax obligations.
South African Income Tax legislation read together with any relevant Double Tax Agreement (DTA) in place where applicable, is the basis used to determine the tax residence status and timing of any change to a taxpayer’s residence status.
If you have been living in a foreign country for an extended period of time, and if you are regarded as a tax resident of that country (in terms of their local laws) and if a DTA is in place between South Africa and that country, whether or not you decide to leave South Africa permanently, you must consider whether by virtue of applying what is known as tie breaker rules in a DTA, you might be considered to be a non-resident of South Africa. Tie breaker rules are set indicators used to determine which country wins the right to your tax residence, as an individual cannot be tax resident in both countries where a Double Tax Agreement applies.
In certain situations, individuals are at liberty to enjoy the best of both worlds, such that their personal relations and economic interests are spread across different countries without ever having an intention to leave any one country permanently. If summer can be enjoyed all year round why not! Where such personal and economic interests are evenly spread between South Africa and another country, and a Double Tax Agreement is in place between South Africa and that country, careful consideration must be taken when applying the tie breaker rules in terms of a Double Tax Agreement.
When you cease to be ordinarily resident by leaving with the intention of never returning to South Africa, this implies that you have taken up your usual or principal residence in another country and made that country the place you would naturally and as a matter of course return. Factors used by the SA Revenue Service (SARS) to assess whether a taxpayer might still be ordinarily resident in South Africa, despite your said intention to leave permanently are described in Interpretation Note 3 as follows:
- Most fixed and settled place of residence
- Habitual abode, i.e. present habits and mode of life
- Place of business and personal interest
- Status of individual in country, i.e. immigrant, work permit periods and conditions, etc
- Location of personal belongings
- Family and social relations (schools, religious and club memberships, etc)
- Political, cultural or other activities
- Application for permanent residence
- Period abroad; purpose and nature of visits
- Frequency of and reasons of visits
In practice, additional information such as the type of visa on which you have gone to the foreign country, proof of permanent residence and a certificate of tax residence has been requested by the SARS, and such burden of proof lies with the taxpayer.
The complexity of this aspect of tax legislation has gained a significant amount of recognition in the industry, and it is evident that SARS’s internal processes and systems are gradually aligning with this legislation over time. Upon submission of an individual’s income tax return (prior to 2022), an option to declare that the taxpayer ceased to be a tax resident in that year or previous years, triggered a verification by SARS of the taxpayer’s residence status, and SARS requested the abovementioned information. Upon finalisation of verification of the taxpayer’s residence status and the income tax return, SARS then issued a Notice of Non-Resident Tax Status letter, via the submission of the income tax return alone. However, since filing season opened in July 2022, this option is not available for the 2022 income tax return. A request for a change of tax residence status of the taxpayer must now be done via the RAV01.
The above is not intended to replace expert tax advice. Assessing your tax residence and filing obligations can become an intricate process and depends on your situation.
We are a team of specialists who are available to assist with any of your tax emigration or immigration needs. This includes a detailed comparison of taxes and estate planning needs for South Africa versus any foreign country you are planning to move to or from, which will aid your decision-making process.
Consultant: Tax & Advisory, Cape Town