As a South African living or planning to live abroad, you need to determine if you should pay tax in South Africa once you’ve moved offshore. Because South Africa has a residence-based tax system, persons who are a “resident” in South Africa (for tax purposes) are taxed on their worldwide income, subject to certain exclusions. Non-residents (again, for tax purposes) are taxed only on income that has its source (rental, interest etc.) in South Africa.
The Income Tax Act defines a resident for tax purposes. You are considered to be a South African tax resident if you meet one of two tests:
- (1) The ordinarily resident test or
- (2) the physical presence test and
- you are not deemed to be exclusively a resident of another country for the purposes of the application of any tax treaty.
The ordinarily residency test (1) is conducted first to determine residency and only if the answer is negative will the physical presence test (2) be relied upon.
- Ordinarily resident test:
This is a subjective test as it is based on the intention of the taxpayer and circumstances to support that intention. Someone is ‘ordinarily resident’ where they have their usual or primary residence, i.e. what may be described as their real home. The question to ask where there is uncertainty: “Where do you return to, to go home from your wanders?”
The following factors will be taken into consideration in guiding the decision:
- Your intention to be/not to be ordinarily resident in South Africa;
- Your most fixed and settled place of residence;
- Your habitual abode, that is, the place where you stay most often – where you and your family have a life;
- The place where you conduct your business and personal interests;
- Employment and economic factors;
- Your status in South Africa and in other countries, for example, whether you are an immigrant and what the work permit periods and conditions are;
- The location of your personal belongings;
- Your nationality;
- Family and social relations (for example, schools, places of worship and membership at sports or social clubs);
- Political, cultural or other activities;
- Any application made for permanent residence or citizenship;
Periods abroad, purpose and nature of those visits as well as the frequency of those visits.
- Physical presence test:
This is an objective test as it is based purely on the number of days you have spent in South Africa over a specific period. The South African Income Tax Act sets the parameters for this test.
When you cease to be ordinarily resident in South Africa, for example where you left South Africa to work abroad without the intention of returning to South Africa, the physical presence test will be used to determine if you are a tax resident.
If your circumstances comply with all the requirements of the test, you will be deemed a South African tax resident for that tax year. The impact is that you will be liable to pay income tax In South Africa on your worldwide income – even if you do not consider South Africa to be your home anymore.
The requirements are:
- A person must be physically present in South Africa for a period or periods exceeding –
- 91 days in aggregate during the tax year under consideration;
- 91 days in aggregate during each of the five tax years preceding this tax year; and
- 915 days in aggregate during the five preceding tax years.
If the natural person ceased to be an ordinary resident and is outside of South Africa for a continuous period of at least 330 full days, that person will not be regarded as a South African tax resident.
In most instances, if you leave South Africa with the intention of living abroad permanently, you will cease to be a South African tax resident (due to the ordinarily resident test) and the result is that you will no longer pay tax in South Africa on worldwide income, but only on income from a South African source. (For capital gains tax (CGT) purposes you will only be liable for CGT on the disposal of immovable property situated in South Africa or if you sell a business that was domiciled and registered here).
Financial Emigration Questions & Answers:
What happens on the date you cease to be a South African tax resident?
When you cease to be a tax resident of South Africa, the Income Tax Act states determines that you are deemed to have disposed of all your assets for CGT (capital gains tax) purposes. Therefore, you can become liable for CGT on your assets (even though you do not really dispose of them). This can have a massive financial impact and should be considered carefully when planning for emigration.
Is it possible to change your South African tax resident status to a non-resident?
If you do not meet the South African tax resident requirements, you will be classified as a non-resident for tax purposes in South Africa. As for how to change your South African tax resident status at the South African Revenue Services to a non-resident, this is done through a declaration on your South African tax return.
In addition, you can obtain a “tax residency certificate” from your local tax authority in your new home country, stating that you are a tax resident of that country.
Does financial emigration change your South African tax resident status?
No, the fact that you can record your financial emigration any time after you have left South Africa, means that this process will probably not coincide with your actual change in tax residency status, based on the requirements set by the South African Tax Act.
Financial emigration is the process whereby you change your residency status – for exchange control purposes – from resident to non-resident, which has no bearing on your South African tax resident status. The establishment of your residency status, for exchange control purposes, simply determines how you can transfer your income and capital from South Africa, offshore.
Do I need to pay tax in South Africa if I work overseas?
If you are a tax resident of South Africa but working abroad, you may qualify for the foreign employment income exemption contained in Section 10(1)(o)(ii) of the South African Income Tax Act.
Do you qualify for foreign employment income tax exemption?
The South African Income Tax Act provides for certain requirements to be met before the foreign employment income exemption can be made available.
- In terms of current legislation, the exemption applies in respect of services rendered outside South Africa for or on behalf of an employer if you are outside South Africa for a period or periods exceeding 183 days in aggregate, during any twelve-month period commencing or ending during a tax year of which 60 days had to be continuous.
From the 1st of March 2020, the application of this exemption will be limited. The amendment provides for a cap on the exemption to the first R1 000 000 earned abroad. Therefore, all foreign employment income earned by a South African tax resident will be taxable in South Africa subject to double taxation agreements with other countries to the point that the income earned exceeds R1 000 000 during any tax year.