By Madelein Grobler
Packing your bags and leaving on a jet plane seems a lot more complicated than it should be, but keeping yourself informed puts you in a position to make better decisions and choices as to how you want tax to impact your life abroad
Stat SA released the Community Survey 2016 noting that a total of 94 760 South Africans had emigrated in the period 2006−2016. A more recent study performed by the Pew Research Centre in February 2018 notes that 900 000 people born in South Africa were living abroad for one year or longer, the top three destinations being the United Kingdom, Australia and the United States.
The statistics showcase the trend of South Africans, being more mobile in a worldwide economy, becoming global citizens. The question therefore arises: ‘How does South Africa treat these global citizens from a tax perspective?’ The question becomes more daunting given National Treasury’s proposal in 2017 to amend the foreign employment income tax exemption – that is, if a South African resident works in a foreign country for more than 183 days a year, foreign employment income earned is exempt from tax, subject to certain conditions.
It is clear that different tax requirements apply to South African tax residents and non-tax residents. The term ‘resident’ is a complex concept not only for the tax regime (the South African Revenue Service, SARS), but also for various other regulatory regimes such as the Department of Home Affairs and the South African Reserve Bank (SARB). These regulatory regimes use a similar terminology but have different requirements and consequences.
It is of utmost importance to understand the concept of ‘resident’ when you have left or intend to leave South Africa on a temporary or permanent basis, as such decision or action can impact you for life.
So, what is your tax residency status?
For South African tax purposes, the Income Tax Act defines a ‘resident’ as meaning any natural person who is ordinarily resident in South Africa or who meets all the requirements of the ‘physical presence test’. ‘Ordinary residence’ is not defined, however, and ultimately depends on the individual’s specific facts and circumstances. Various factors are considered including the individual’s intention and action taken to effect such intention.
However, a natural person may also trigger tax residency in a foreign country after having been in that country for more than 183 days in the tax year of such a foreign country in terms of internal rules of that country.
So, if you leave South Africa, as a South African tax resident you would likely become subject to the tax residency provisions of the foreign country when you relocate. But does that mean that both countries can tax you?
In these circumstances it would be important to determine if South Africa has a double tax agreement (DTA) with the foreign country and consider the tiebreaker clause (usually article 4 of the DTA, being the ‘residency’ provision).
In applying the tiebreaker clause, the result is that the natural person is exclusively tax resident in the foreign country, which implies that such person will not be regarded as a South African tax resident (despite meeting the requirements).
How does your tax residency status compare to exchange control residency?
Any natural person who has been in South Africa since the commencement of the exchange control regulations is deemed to be a South African resident for exchange control purposes − unless the contrary is proved. Any person who has taken up permanent residence, is domiciled in or is registered in South Africa is also considered to be a South African resident for exchange control purposes.
It follows that when you leave South Africa as a South African resident but do not formalise your emigration, you will remain a South African resident until you prove the contrary. Your South African resident status will remain irrespective of the period of your absence from South Africa.
Consequences of remaining a South African tax resident
A South African tax resident will be taxed on his/her worldwide income and capital gains tax despite being in a foreign country. South African tax residents may also trigger tax residency in a foreign country resulting in taxation in that foreign country where he/she works or holds capital assets. But does that mean that double tax is payable?
In these circumstances, the source of the South African tax resident’s remuneration plays an important role, as certain exemptions may apply. The foreign employment income tax exemption is probably the most commonly known, which provides that the portion of the natural person’s remuneration that relates to employment services rendered outside South Africa will be exempt from South African tax if the person is:
- More than 183 full days outside South Africa during 12-month period
- More than 60 consecutive days outside South, and
- Services are rendered outside South Africa during the 12-month period
Amended legislation coming into force from 1 March 2020 affects the current exemption as after this date the exemption will be limited to only the first R1 million of foreign remuneration, while the same requirements will have to be met.
Furthermore, a South African tax resident can also claim a foreign tax credit (FTC) against his/her South African taxes. The rebate will be in respect of foreign taxes paid on non-South African-sourced taxable income but has certain limitations.
The compliance requirements to access these reliefs should be kept in mind which include submitting a tax return in South Africa and also being able to prove any foreign taxes paid.
Consequences of ceasing to be a South African tax resident
The most extreme tax consequence upon ceasing of South African tax residency would probably be the capital gains tax exit charge − that is, a deemed disposal of worldwide assets at market value that arise on the day before ceasing South African residency. Cognizance should be taken of certain exemptions in this regard.
The consequence of ceasing South African tax residency would be that, given that such person would be considered a non-resident, such person will only be taxed on South African-sourced income. For example, non-residents will be subject to income tax on rental income that arises in South Africa from a residential property situated in South Africa.
In addition, if a person ceases South African tax residency but retains some work responsibilities in South Africa, he/she may still have a South African tax liability. Remuneration earned by a person while rendering services in South Africa but employed in a foreign country may still be taxable (on an apportionment basis of workdays spent in South Africa) although the remuneration is not necessarily paid in South Africa. This is based on the general principle that the source of remuneration is usually accepted to be located where the services yielding the remuneration are physically performed. The recent ITC14218 Tax Court judgment, however, stated otherwise. The Tax Court held that in determining the source of the remuneration one need to look at the originating cause of the remuneration, being the contract of employment. The Tax Court viewed the rendering of services in this particular case as no more than just the reciprocal performance by an employee to his employer.
From a tax administration perspective, it is important to note that if a person ceases to be a tax resident, the tax year is deemed to end on the date that residency ceases and a new tax year will commence on the day thereafter. Such ceasing in residency should be indicated on the income tax return via the ‘wizard’ on efiling (that is, questions asked when opening a tax return), which asks the question whether the taxpayer ceased South African tax residency during the year of assessment.
Consequences of ceasing to be a South African exchange control resident
A person renouncing his/her South African domicile permanently and who formally emigrates is eligible to take certain assets and capital out of South Africa. These allowances include:
- A foreign capital allowance of R20 million per calendar year for a family unit or R 10 million per calendar year for a single person
- A once-off travel allowance of R1 million per person emigrating
- Exporting personal and household effects including motor vehicles, trailers, caravans, motorcycles, stamps, coins and minted gold bars (excluding coins that are legal tender in South Africa) per family unit or single person limited to an insured value of R2 million
In the event that the above limits are exceeded, such matters would need to be referred to the exchange control authorities for specific approval.
Similarly, any cash balances that remain after emigration facilities have been conferred together with capital payments accruing thereafter (including sale proceeds of assets subsequently sold) need to be credited to an ‘emigrant capital account’. Such account is controlled by an authorised dealer (a local bank) but the funds may be used in South Africa for any purpose and at the discretion of the emigrant.
If this article has sparked your interest, I would recommend that you refer to the 2018 SAICA emigrant guide, which provides an overview of the most important South African income tax and exchange control considerations for individuals who have left or intend leaving South Africa on a temporary or permanent basis.