In the previous article, Demystifying Tax Residency, we discussed tax residency and how the physical presence and ordinarily resident tests were used to determine residency for tax purposes before. While these tests are still applicable, the three-year rule and new AIT protocols have complicated matters somewhat.
We take a closer look at the requirements for determining tax residency.
Determining residency pre-2021
South Africa changed from a source-based tax system to a residency-based tax system in 2001 which meant that residents would henceforth be taxed in SA on their worldwide income. This ‘residency’ was based on the ‘day test’ or ‘time rule’ – known colloquially as the physical presence test as well as the ‘ordinarily resident’ test.
In general, the ordinarily resident test supersedes the physical presence test, though a combination of the two has been considered in rare circumstances. Individuals who were physically present in SA for an aggregate of 91 days in a year of assessment and for each of the five years preceding that, as well as an aggregate of 915 days in the five preceding years, were considered an SA tax resident. Conversely, those who were outside SA for 330 consecutive days were automatically considered non-residents for tax purposes.
Additionally, Section 10(1)(o)(ii) of the Income Tax Act of 1962 outlined the apportionment and prorating of taxes payable to respective jurisdictions based on their sources of income and habitual abode. This accommodated Double Taxation Agreement (DTA) directives between countries which allowed South Africans an exemption on taxes provided they spent a minimum of 60 consecutive days working outside of SA and an aggregate of 183 days per year of assessment. (Reduced to 117 days during Covid-19 lockdown). This rule only applies if the individual was employed for the full period abroad so has no bearing on periods of leisure or travel which weren’t catered for by their foreign employer.
Cutting down tax evasion
While many South Africans simply bargained on provisions of the Act and assumed they were automatically considered non-residents for tax purposes or, used DTA directives to sidestep taxation in SA – SARS noted that these directives were being abused and that the ‘outcome is contrary to the purpose for which exemption was introduced’.
Many individuals used the DTAs to evade taxation almost entirely as some foreign jurisdictions have far lower rates of taxation – also known as tax havens. While DTA’s were put in place to ease tax burdens to those who operated across borders, abuse of such exemptions prompted stricter regulation.
SARS subsequently imposed a threshold on the foreign income exemption of R1,25-million and also removed the option on tax filing which allowed expats to simply tick the ‘non-resident’ box.
The three-year 'cease to be a resident' directive
As of 1 March 2021, SARS has amended the rules for determining cessation of tax residency by stipulating that individuals need to remain outside South Africa and prove they are tax residents of the foreign country for three consecutive years. It’s crucial that individuals inform SARS that they have ceased to be residents on the day of leaving. In fact, according to Tax Faculty, you only have 21 days from the date of leaving SA to inform SARS that you ceased to be a taxpayer – something which conflicts with the general 183-day requirement of most foreign countries to confirm foreign tax residency.
This rule has obviously caused some confusion for those who have relied on the ordinarily resident and physical presence tests thus far. While SARS hasn’t removed these tests from their documentation – this is because that criteria still applies for individuals who want to prove that they are tax residents of SA, not the other way around. The conclusion is therefore that the residency tests may or may not be applicable to a different degree depending on individual circumstances.
Individuals who have been outside the country for a significant number of years or made use of DTA directives previously can still bargain on the validity of these tests to an extent, but confirmation will be at SARS’s discretion.
TCS & AIT protocols: proving you're a foreign tax resident
The first steps for tax emigration are notifying SARS of your non-residency status and calculating deemed Capital Gains Tax. Exit tax on capital gains will be levied on assets including offshore properties and share portfolios as at their value on the day before you ceased being a resident of SA.
Non-compliance will hamper financial activities abroad
Financial services providers and home affairs offices (or their equivalent abroad) in other countries also need to comply with international tax rules and the protocols of the Automatic Exchange of Information which means that economic activities in these regions may be limited if SARS hasn’t confirmed the individual’s compliance.
The upside: already fulfilling tax obligations overseas?
While the new processes complicate proving one’s tax residency, those who have lived and worked abroad for a significant period of time will find the process far easier to manage. Individuals who are already paying taxes abroad will have sufficient proof that they are no longer obliged to pay taxes in SA and tax authorities will also have all the required documentation to verify their residency, financial activities, and tax calculations.
If you need help navigating this process across borders, why not get Rand Rescue to help you out? We have the necessary accreditation, experience, and resources to manage all parts of your cross-border taxes on your behalf.
The information provided in this article and on this website is intended for general informational purposes only. It is not a substitute for professional advice, whether financial, legal, or otherwise. Before making any decisions or taking any actions based on the information provided on this site, we strongly recommend consulting with qualified professionals who can assess your specific circumstances and provide tailored guidance.