In the previous edition of issues for expats I tackled the problems confronting SA Citizenship and how a person living abroad could easily lose their rights if unfamiliar with a curved ball in the Citizenship Act. In this article I will deal with residency for Income Tax purposes and more unintended consequences of getting it all wrong.
Tax Residency is vitally important because it determines whether or not you are liable to taxation in South Africa – now primarily a residency based tax regime as opposed to the old “source based” regime we had prior to 1 March 2001. The general rule is that if you are a resident for tax purposes you are subject to taxation on all your world-wide income and capital gains, no matter in which country they arose. The problem is that most folk who left South Africa without formally emigrating probably did so through their bankers by taking a temporary relocation allowance which allowed them to ship out household furniture and some funds – but on the basis that they intended to return “home” to SA at some stage in the future!
There are two tests for SA tax residency – and you must fail the first before you can apply the second test. To compound matters – the first test is not defined as such but encompasses the term “ordinarily resident” which must be interpreted under our common law. As an over simplification of a complex concept a common thread in these cases suggests that you are “ordinarily resident” in the place you would regard as your permanent “home” … the place you would tend to return to after your world-wide wanderings. So – if you left SA intending to come back after a period of time – you would still be “ordinarily resident” in South Africa and subject to world-wide tax here … no matter how long you lived “temporarily abroad”.
Fortunately your foreign earnings from employment will be exempt from taxation in SA provided you are out of the country while so employed for one continuous period of at least 60 consecutive days and a cumulative total [which may be broken periods added together] of 6 months of the year. However – all your other income and any capital gains you may make – would be subject to taxation in South Africa, even if taxed in the country where you are living. You will get some relief from double taxation only if the country in which you live has a Double Tax Agreement with SA. Note however that the RSA Government now plans to do away with the above exemption with effect from 1 March 2020 – and instead wants to tax the remuneration earned abroad by a South African resident taxpayer where that person’s remuneration exceeds ZAR one million per year! It seems, for now, that foreign remuneration below R1-million will not be taxed.
The unintended consequence? Many expats fit into the circumstances I have described above. Some inform our Revenue Services [SARS] that they have “left the country” and take solace in the fact that SARS may pend their tax file. Youngsters leave before registering with SARS to complete annual tax returns. Almost all don’t realise that for tax purposes they remain “ordinarily resident” in SA and that until they make it clear to SARS that they have left the country permanently without any intention of returning – they are liable to taxation in South Africa. However the facts must fit the circumstances so making such a declaration to SARS while retaining a residence in SA [even if you let it out] could unravel your story.
The local tax consequences could be severe, especially when you take into account the exchange rate applied to bring income or gains into ZAR on which any taxes would be levied. In the third and final article I will wrap up with SA residency for Exchange Control purposes while tying together the topics of Citizenship and Tax residency.
[next article … Exchange Control Residency … Unintended Consequences continued …].