South African Temporarily Abroad: What Does This Mean & What Are The Legal & Tax Implications?
The debate over the definition of “South African temporarily abroad” is a longstanding one. For although the South African Reserve Bank and South African Revenue Service have applied their regulations quite uniformly across the board, its definition of ordinary residency has always been vague, to say the least.
Why does one’s residency status matter?
To date, South Africans working abroad for certain periods could rely on the 183/60-day definition (physical presence test) of temporary offshore residency in order to claim exemption on foreign sourced income. By this definition, individuals who have worked outside South African borders more than 183 days in aggregate and more than 60 days concurrently would be deemed “South Africans temporarily abroad” for taxation purposes. Those individuals who have therefore acquired an income offshore during 184-day aggregate and 60-day concurrent stretches abroad would therefore be exempt of taxation on this foreign income.
As stated in one of our previous articles, however, draft legislation to eliminate this tax exemption for individuals temporarily abroad has already been submitted to parliament and public commentary on the matter closed on 31 August 2017. Once ratified, the amended legislation will take effect from 2019. This means that the custom 183/60-day marker no longer offers an olive branch to saffas abroad.
How can residency be determined without the 183/60-day rule?
Although the abovementioned estimation has been widely accepted as a definition for temporary offshore residency, it has always been a rough yardstick for estimating one’s residential status and not a rule as many individuals believe. In actual fact, the Income Tax Law quite vaguely states in Section 82 that the burden of proof for determining residency relies on each respective individual.
The rules and regulations for determining residency are so vague, in fact, that regulators have been relying on determinations of court cases as well as variable and highly personalised residency markers applicable to each respective individual to determine residency. Most South Africans will not have been aware of this, seeing as the unofficial 183/60 rule has been applied quite consistently in most cases.
Nevertheless, there have been cases where South Africans abroad for short stints have been deemed non-residents for taxation purposes while there are other instances where individuals abroad for several years still qualify as South African residents who are temporarily abroad. In essence, if one delves into the legal definition of “ordinarily resident” as contained in the Income Tax Act, there is thorough room for interpretation and variation.
Among other things, determination of residency (as must be proven by the individual seeking such determination), relies on extensive qualifying criteria. Some of these include the individual’s:
- common place of residence
- personal habitual abode
- political activities
- cultural activities and interests
- visa and/or residency applications
- belongings and the location of such belongings
- frequency of visits to their home country
- social status and activities in their new country
- personal interests
- place of business
The criteria for determining individual residency status is, however, fluid – and the courts allow for individuals to argue their individual cases should they wish to contest this status. Needless to say, such legal action would be rather protracted without certain gain for the individual undertaking such action – most probably the reason why such action is rare.
What difference does the new legislation make if ordinary residency is so vague?
Well, it seems the tax man is well aware of the confusion around ordinary residency, which is why amendments to the Income Tax Act would not call for redefining such residency. Instead, it’s completely eliminating tax exemption on foreign-sourced income for individuals who are temporarily abroad.
Once the legislation comes into effect in 2019, this would mean that South Africans across the board across would be liable for tax on their total income – whether sourced locally or abroad. Of course, SARS would only recover the tax shortfall. Consequently, the taxes due to South Africa would be determined by the difference between the tax thresholds and tax treatment in South Africa and the country where tax on such income has already been paid. Should South African expats find themselves in countries with similar thresholds, the new legislation would have a marginal impact on them. For those living or working in countries with far more lenient taxation, the implications could be grave, however.
What options do South Africans have?
For the interim South Africans living and working abroad needn’t be too concerned with the taxation amendments as there is still more than a year to consider your options. The primary recourse should you wish to continue tax exemption on your foreign income would be to apply for financial emigration, and such a process could take some time depending on your financial portfolio.
By applying for financial emigration you formally request that SARS and SARB no longer view you as a South African resident for tax purposes. This process doesn’t affect your citizenship but merely cuts you loose from financial obligations to your homeland.
If you’re one of those who will be affected by Income Tax Act amendments, Rand Rescue can assist you in repatriating your funds abroad and facilitate all the administration on your behalf. Contact us to discuss your options.