The idea of residency, as well as how to determine it, is a core issue for any taxpayer.
No concept is more important in tax than that of residency. After all, any revenue service will only ever have the right to tax items that occur within its jurisdictional border or any person who resides within those borders. This makes the idea of residency, as well as how to determine it, a core issue for any taxpayer. As a general rule, this is not really a contentious issue for legal entities but is hugely relevant for natural persons due to their mobility and relatively light compliance requirements.
For tax purposes, the definition of resident is very clearly defined in the Income Tax Act. The issue, however, is that once you start to apply this definition in practice, you run into a number of issues. At its core this is a problem of education although it’s exacerbated by the fact that different bodies use different definitions for the same terms. The media storm last year about the proposed changes to the section 10(1)(o)(ii) exemption highlighted this perfectly. It seems that in the greater South African populace, the term ‘resident’ takes on any variation of its dictionary meaning, the meaning given to it by the South African Reserve Bank, the citizenship rules issued by the Department of Home Affairs, or some rough understanding of the definition given in the Income Tax Act. This is further compounded by the fact that the Income Tax Act definition can be overridden by the requirements of double taxation agreement (DTA) so-called ‘tie breaker’ rules. This has resulted in statements such as:
- As long as you own a house, you’re still tax resident in South Africa.
- Unless you let SARS know that you’ve left, you’re a tax resident in South Africa.
- Changing your tax residency status means giving up your South African citizenship.
Not one of those statements is true. SARS has issued two interpretation notes (IN3 and IN4) to try and provide some guidance on how the legislation should be applied, which is welcomed. However, the ‘ordinarily resident’ requirement is still a fuzzy concept with no cut and dried rules that can be applied by laypersons. It is also an outdated concept given how mobile people have become.
This problem is exacerbated by the fact that SARS currently has no coherent system for notifying it of your residency status, either due to a change of intent or application of a DTA. The 2017 IT12 was the first time that SARS actually included a tick box on the wizard that asked about the residency status of the taxpayer. This means that any tax return that was completed before then was done on a basis purely determined by the taxpayer or their tax practitioner. This has led to some of the following issues:
- It is difficult to determine on what basis (that is, worldwide income versus South African source only) the tax return was completed if this ever has to be reviewed.
- Does SARS have a ‘default setting’ on which taxpayer numbers are issued? Or put differently, how is SARS keeping track of the residency status of taxpayers?
- If there is ever a verification or audit of a tax return, what proof would satisfy SARS that someone has truly become non-resident?
- Many taxpayers are just not bothering to notify SARS, as there is no formal process.
- Some taxpayers believe that simply deactivating their tax number serves as notification.
- The Tax Compliance Certificate for Emigration which is used by the South African Reserve Bank to process its emigration process is seen as notification of a change in residency.
- In many instances where individuals have tried to notify SARS, SARS won’t accept the change in status without a residency certificate from their new home. Not all jurisdictions issue these certificates.
A further concern is the deemed ‘exit charge’ that is levied under section 9H when a resident becomes a non-resident. It is accepted that many of those who are leaving are doing so with all their assets – for them this charge is semantic. It is, however, a disincentive for those who may have wished to keep some assets behind – at least they will be compensated later by not having to pay South African capital gains tax (CGT) on those assets. But a group that is far more at risk, with no clear guidance being issued by SARS, are those whose residency status has changed due to the application of a DTA. Under the tie breaker rules, it is certainly possible that an individual who has accepted a two-year contract in an offshore destination could have a change in residency under those conditions. This would mean that the individual would have to pay CGT on all their assets on the day their residency changes. Then, once their contract ends, they become resident again and could become non-resident again as soon as the next opportunity arrives – imagine having to account for the CGT each time!
Some of these issues can be fixed simply by improving or changing the administrative processes at SARS. Others, however, will require a more comprehensive overhaul of our income tax system. The following proposal could possibly help to significantly reduce the confusion and frustration experienced by taxpayers:
- Implement an educational programme explaining to taxpayers what it means to be resident.
- Provide a clear administrative process for declaring residency status with SARS.
- Provide an exemption to the section 9H deemed disposal if the change in residency is simply due to the tie breaker rules in a DTA.
- Overhaul the residency definition by:
- Rethinking the concept of ‘ordinarily resident’ in a mobile global society
- The inclusion of a negative test – if you have been out the country for a set number of years, you will by default be considered non-resident
- Australian tax law allows for a temporary cession of residency, under very strict rules and requirements.
If nothing else, it is time that National Treasury and SARS accept that we live in a mobile world, and it’s time our law and administrative processes reflected that.
Carmen Westermeyer CA(SA), Director at Maitland & Associates.
This article was originally published in the August 2018 issue of ASA.