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South African Expats Tax Residency: SARS Is Coming For You…Again

Much like its namesake, the Sars virus, SARS seems to have a penchant for rerearing its head just when you think you’re well and truly cured. 

The matter at hand is that of tax residency and how SARS determines your obligations or exemption from tax.

Tax residency conundrum

There are essentially two ‘parts’ of regulation relevant to the topic at hand. 

The first is a new interpretation of existing legislation which came into effect 1 March 2020 pertaining to the taxation of foreign income, and the second is the lifting of exchange control regulations previously imposed on cross-border flow of money, which came into effect 1 March 2021. 

The former is the reinterpretation of Section 10(1)(o)(ii) of the Income Tax Act 58 of 1962 which provides a tax exemption of R1,25 million (per annum) on foreign employment income with 45% taxation imposed above this cap. This article is mainly concerned with the latter, but we will briefly touch on the former.

The exemption applies only to South African taxpayers who :

 – worked outside SA borders (whether for a South African or foreign employer) for a period exceeding 183 full days in a 12-month period, and
 – more than 60 of these days must have been spent outside SA borders continuously.

While this rule is not the topic under discussion here, there are two scenarios where it could have bearing.

The boomerang: non-resident tax obligations

South Africans who had emigrated some time ago who return to SA and spend more than 183 days in 12 months in  SA (including more than 60 consecutive days) are liable for taxes on income generated from a South African source during this time. For the most part this is imposed in the form of withholding tax – generally 15% irrespective of the source of the income (with some exceptions which we’ll cover in a different article). 

This has no bearing on South Africans who emigrated more than 3 years ago (post 1 March 2021) or more than 5 years ago (pre 1 March 2021), but it could pose an issue for those who believe themselves to be free of the SARS throttle based on prior actions on their own part, or prior rules.

Any prolonged presence or financial activity within South Africa will most likely call into question whatever past non-residency status individuals had been granted by. SARS can also reverse or undo a former status which not only makes the individual liable for historic and future tax in SA, but could ‘reset the clock’ in terms of the 3-year retirement savings lockdown rule. 

Ticking the right boxes

An additional issue is where South Africans who were supposed to impose the exemption on their foreign income as SA tax residents ticked the ‘non-resident’ box on their tax returns instead and deemed themselves non-residents without any formal confirmation of this status.

Whether South Africans working temporarily abroad or those who are abroad indefinitely – such an oversight could come back to bite you. 

No more exchange control

The primary concern with new measures implemented by SARS relates to regulatory changes which came into effect on 1 March 2021 – the scrapping of previous exchange control regulations. 

Before this date, South Africans who wished to forego paying taxes in SA could:

 – determine their non-resident status through an ordinarily resident and/or physical presence test, 
 – apply for tax exemption under a DTA, or
 – formally sever their tax obligations with SA by applying for financial emigration.

Financial emigration was also the only way to bypass retirement annuity rules which prohibit South African tax residents from encashment and transfer of retirement annuity proceeds across SA borders before retirement age (55). 

Financial emigration was facilitated by three primary entities – the SARB, SARS and authorised dealers (major banks) up until 1 March 2021.

The SARB to SARS handover

As of 1 March 2021, exchange control as we knew it was officially scrapped.

While the treasury painted this as a pro for South Africans and promised a less ‘taxing’ process (mind the pun) for managing money across borders, it came with many caveats.

Most notably – South Africans who had not yet kickstarted their financial emigration before this date would henceforth need to ‘lock down’ their retirement savings in SA for a three year period from the date of emigration. 

Once this three year period has passed, individuals are allowed to withdraw and transfer their retirement savings abroad – provided they are under retirement age.

The new process would also eliminate the need for the SARB to approve the cession of tax residency – including the need for banks to create and manage ‘blocked accounts’ for residents who emigrated financially. 

The new process is managed entirely by SARS and while this has been the case for a while, testing the actual process wasn’t possible until the new tax season.

SARS – vagueness and contradictions

The new rules weren’t accepted with glee by most South African expats (and prospective emigrants), and yet things had settled down as most assumed a vague idea of how the process would transpire.

The issue at hand isn’t necessarily the new regulations, but the mechanisms used to facilitate the new processes and determine compliance which are, quite clearly, aimed at addressing mischief (the ‘mischief rule’, as noted by Tax Consulting SA). Unlike legislative changes and amendments which require extensive review and approval before ratification and implementation, the tools and mechanisms used to support such regulations don’t require the same public and governmental buy-in or approval. 

The notion that processes and tools used to enforce and manage regulations are somehow incapable of flexing the regulations they purport to serve is quite nonsensical. Not only that, but SARS’ own disclaimers in all of their published guidelines and documentation provides no actual clarity. Such as the RAV01 guide disclaimer which states:

“The information contained in this guide is intended as guidance only and is not considered to be a legal reference, nor is it a binding ruling. The information does not take the place of legislation and readers who are in doubt regarding any aspect of the information displayed in the guide should refer to the relevant legislation, or seek a formal opinion from a suitably qualified individual.” 

SARS is quick to note in all their notices and guides that the guides themselves come down to interpretation and that such interpretation should be clarified with SARS or with an authorised tax practitioner (while also noting that tax practitioners should clarify the interpretation of legislation with SARS as well).

Auto assessments & reverification

The first major change was the implementation of auto assessments which also changed the structure and details captured on income tax return forms. 

One such change was the deactivation of the tax residency ‘tick box’. Previously (from 2017), individuals could indicate changes in their tax residence status on their ITR12 forms – which didn’t accommodate or require them to enter the date of this change. For the 2020/21 season, SARS updated the form to include the date of said tax residence change – triggering a manual intervention from SARS to complete the submission as well as requiring supporting documents from the applicant. 

The alternative is to inform SARS of change of tax residency (at any time) by submitting a ‘Declaration of Cease to be a Tax resident’ form, also known as the RAV01 form which was made available on their e-filing system in February 2022. 

Reneging on promises

On 1 June 2021 SARS outlined details around the new processes and reassured South Africans whose non-resident status had previously been confirmed that they would not be subject to reverification. 

On their ‘Cease to be a Resident’ page which was last updated on 10 August 2022 , SARS wraps up the section by noting that those who had previously informed SARS that they ceased to be a tax resident of South Africa can request confirmation of their status via a letter to SARS which should contain:

 – the background to the request,
 – the basis on which tax residency was ceased, and
 – the date and manner in which SARS was previously informed.

While some exceptions allow for email letters, hard copy is the only format which satisfies all requirements. Once more the problem is demonstrated in the vagueness of the language and the inherent contradictions. Not only does SARS make it seem like such ‘confirmation’ is an optional and voluntary action, but where individuals had undertaken financial emigration and/or confirmed their non-tax residency status in the past SARS should surely have all the information on record which they are asking for. 

Since such individuals can no longer ‘tick’ the box to confirm their non-resident status, they are also forced to complete the RAV01 declaration when issuing returns. 

The RAV01 declaration

The form itself is quite simple and straight-forward. A noteworthy omission from the form, however, is the huge list of supporting information to be submitted with the form:

 – A letter of motivation outlining the facts and circumstances to support the disclosure that tax residency has ceased ‘in detail’
 – A copy of the applicant’s passport/travel diary. SARS doesn’t stipulate whether one or both of these are required, though a travel diary may be somewhat nonsensical on its own. Nor do they stipulate any period or format for said travel diary.

In addition to the above, individuals must provide additional information subject to their elected ‘basis’ for ceasing tax residency. 

Qualifying basis 1: ordinarily resident test

 – type of visa used to enter foreign country
 – proof of permanent residence in the foreign country (if applicable)
 – certificate of tax residence from the foreign authority or letter indicating the individual’s tax residency
 – details of property in SA and the purpose/use of the property
 – details of business interests and activities in SA
 – details of family – including which family is in SA and why
 – details of social interests (such as gym contracts, recreational clubs and societies)
 – location of personal belongings
 – details of return visits to SA, including frequency and purpose

Qualifying basis 2: physical presence test

In a nutshell, you are considered a South African tax resident if you were physically present in SA for a period or periods exceeding:

 – 91 days in total during the year of assessment
 – 91 days in total during each of the five years preceding the year of assessment, and
 – 915 days in total during the five preceding years of assessment.

Should an individual be outside SA for a continuous period of at least 330 full days they are no longer considered tax residents of SA (from the date on which they ceased to be physically present). 

Qualifying basis 3: DTA

 – certificate of tax residence from foreign revenue authority or letter indicating tax residency status

The children of a bitter divorce?

While SARS ‘sort of’ implied that those deemed compliant in the past are safe from new vetting and verification, the burden of proof seems to fall entirely on the individual – whether past, present or future compliance is to be determined.

Furthermore, while SARS and the SARB had been tight peas in a pod in the past – reading between the inferred lines seems a narrative of star-crossed lovers. 

The hard line reiterated by SARS (specifically in the 2020 Budget Review) lamented the errant actions and behaviours of the shared ‘children’ (South Africa’s current and past taxpayers) and – as is common in separation – while the children may always have pushed the envelope and boundaries, such behaviour is now deemed to be a product of one party’s past negligence, lenience or aloofness. 

When SARS took custody of SA’s tax children, for instance, it also became far more vocal about the drawbacks of previous ‘rearing’ practices. 

These are mere assumptions, of course,  but one has to question why all of SA’s children are being sent to the naugty room without either parent in the SARS-SARB divorce clarifying matters:

 – Is SARS going after those wayward children they believe were raised inappropriately by the SARB (are they trying to rewrite the home rules of vetting and verification imposed in the past)?
 – Is SARS implying that the SARB’s ‘drinking buddies’ – the authorised dealers (banks) – were somehow in cahoots with delinquent children and had pulled the wool over the SARB’s eyes without its knowing?
 – Is the SARB bitter about the divorce to the extent that they’ve changed the Netflix logins so SARS can no longer just chill and needs to pay for their own access (i.e. removing access to data and information previously accessible)?
 – Is the separation based on irreconcilable differences to the extent that SARS cannot contemplate moving on without redecorating the entire house (i.e. are their internal systems and data management processes so divergent that it requires a complete overhaul)?
 – Is SARS bitter about the settlement they were granted and trying to milk the system for that which they feel entitled to?

Are these assumptions completely unfounded and are the two divorcees trying desperately to manage their spawn without informing any of said children how vindictive and exploitative each of them are in an effort to keep the peace?

Whatever the case may be, there is a very clear risk for any and all South Africans living and working abroad:

Should your tax residency not be confirmed and verified by SARS, you are up for auditing.  

This phrasing has certainly not been used in any press releases, but it is quite clearly implied throughout. Fess up or keep watching your back.

The RAV01 declaration and resubmission of documents to determine tax residency may be a form of audit in itself, but it’s still far less invasive than the audit which could possibly slap you by playing dumb or mum. 

It’s a Catch-22. On the one hand, SARS may not be interested in your financial affairs and already deem you compliant in which case the reverification may simply be an inconvenience or place you on their radar unnecessarily. On the other hand, if your activities or affairs are of a nature or monetary value which satisfies SARS’ internal triggers for auditing (whatever arbitrary rationale informs this), you may be targeted and scrutinised more intensely if you don’t request reverification. 

Let Rand Rescue help you out

While Rand Rescue has no control over the rules or mechanisms imposed by SARS, we are also dismayed that some of our clients whom we’ve assisted with their financial emigration or other affairs may be vulnerable at present. 

If your information is already on book with us, we can assist you in reconfirming your tax residency and/or provide whatever information we have on record to assist with this process.

Likewise, we would also like to assist other South Africans in managing their cross-border affairs – whether you are a prospective emigrant or already living/working abroad. 

Please get in touch or contact your past/existing Rand Rescue consultant so we can lend a hand.

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