With a complex tax system and ever changing rules and laws, it can be overwhelming to stay in the know when dealing with your tax once leaving South Africa.
The idea that once you leave SA, all your tax obligations fall away is unfortunately dangerous and incorrect. The standard view of “how will SARS ever know?”, or “I get nothing back for my tax money, so I will not pay”, are unfortunately not good legal defences to the legal obligations a taxpayer has in South Africa.
The question is no longer, “if” SARS will find out, but rather “when” they will find out. With more and more global legislation and rules such as the Common Reporting Standard (CRS), one cannot hide from the long arm of the law, or from SARS for that matter. Financial institutions and revenue authorities worldwide are sharing your information, to ensure that tax is declared and paid correctly.
As a South African living and working abroad, there are three typical options when dealing with your tax in South Africa to keep compliant and protect from being overtaxed:
R1.25mil foreign employment exemption and tax credits - This option is where one intends to return to SA on a permanent basis (and meet the requirements of either of South Africa’s legislated tax residency tests ie. the ordinarily resident test or the physical presence test), thus you remain a tax resident of South Africa. As a tax resident, you are obligated to declare worldwide income and assets to SARS every year on your tax returns. Once declared, you need to prove to SARS that in terms section 10(1)(o)(ii) that all requirements have been met to exempt the first R1,25mil from tax. Everything above this will be taxable in SA. However, there is the option of applying tax credits, for tax paid in another jurisdiction on that income, if applicable.
The requirements of this exemption are:
a. Foreign income must be declared on the SA tax return;
b. The income must be for foreign services rendered, as an employee (independent contractors are not exempt);
c. One must be outside of SA for more than 183 days per 12 month period;
d. 60 of those days must be continuous days.
Double Tax Agreement/Treaty - This option is also generally used where one’s intention is to return to SA, and thus one cannot cease their tax residency. The Double Tax Agreement relief requires that one declare to SARS every year on their tax return all foreign income. One needs to prove to SARS that in terms of Article 4 of the Double Tax Agreement, that all requirements of this Article have been met and that centre of vital interests does not sit in SA. Making use of the DTA, can be a way of temporarily ceasing tax residency. In layman’s terms, the DTA will decide which jurisdiction (South Africa or the foreign jurisdiction) has the taxing right over the foreign income earned.
A major misconception is that if one is in a zero tax jurisdiction, this option cannot work, which is incorrect. Another is that because one is paying tax in the foreign jurisdiction, their obligations in South Africa fall away merely because there is a Double Tax Agreement in place – this is probably the most dangerous misconception with regard to the DTA.
Some requirements of making use of the DTA are:
a. Foreign income must be declared on the SA tax return annually;
b. Taxpayer must meet the specific requirements of the DTA each year;
c. Taxpayer must be able to prove requirements have been met which often requires documentary evidence being provided to SARS.
Tax Emigration (cessation of SA tax residency) – This option requires that a taxpayer does not meet the requirements of the ordinarily resident test or the physical presence test. To keep it simple, one must be living outside of SA with no intention to return to SA on a permanent basis. Intention can be very subjective, and that is why objective evidence must be reviewed for each individual to determine whether or not they will pass the audit SARS will raise. Where one meets these requirements, an application is done to SARS to cease tax residency. SARS will then raise an audit and supporting information and documentation needs to be provided to SARS to prove that one can formally change their tax residency status. Being a non-resident for tax is beneficial, as there is no obligation on the taxpayer to declare foreign income and assets to SARS, nor is there any tax liability. Income and assets in SA will remain taxable and declarable in the general context.
Some misconceptions taxpayers have with the tax emigration process are that one loses their citizenship of South Africa, or their passport – this is not true. There is no impact on citizenship when ceasing tax residency. Another is that one needs to sell all their assets, close bank accounts and withdraw all funds from South Africa – also not true. A non-resident for tax can own assets in SA; can earn income in SA; and does not need to withdraw any funds whatsoever.
Some requirements for tax emigration are:
a. Does not meet the requirements of the Physical Presence test;
b. Does not meet the requirements of the Ordinarily Resident test;
c. Is able to prove to SARS with objective evidence that they are non-resident;
d. Ceasing tax residency is an active step that must be taken with SARS, in order for SARS to note one’s change in status
It is always important to obtain expert advice in this field of tax, no matter which option one takes.
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