South Africa has a residence-based tax system. This means that even if you are working and living overseas, you may still be considered a South African resident for tax purposes, and you will be expected to pay tax on your worldwide income. If there is no double taxation agreement between South Africa and your new home country, to lighten the tax burden, you could land up paying tax in two different countries – which hardly seems fair, does it?
So how do you avoid paying tax in South Africa when you no longer live in South Africa? It’s called tax emigration, which means you’ll need to wrap up your tax affairs with the South African Revenue Service (SARS) and meet a number of other requirements in order to be eligible to do it. Let’s briefly unpack what it means to become a non-resident for tax purposes in South Africa, and how you can go about it.
Expat tax 2020 and tax residency in South Africa: what’s the deal?
Hold onto your hats, because it’s not as complicated as it sounds: if expat tax applies to you, it means you are a South African tax resident. If you are found to be a South African tax resident you cannot terminate your South African tax residency status but if you can prove by means of the ordinary residence and the physical presence tests that you are not a South African tax resident, only then are you eligible to terminate your tax residency with the South African Revenue Service (SARS).
Here’s what you need to know about how to terminate your South African tax residency:
The first step is to establish whether or not you are a South African resident, for tax purposes.
- The ordinary residence test: Any individual who is ordinarily resident in the Republic during the year of assessment. If they fail this test, then they can still be regarded as a tax resident if they meet all three requirements of the physical presence test.
- The physical presence test: the individual must have feet on South African soil for no less than:
- 91 days in total during the year of assessment under consideration;
- 91 days in total during each of the five years before the year of assessment under consideration; and
- 915 days in total during those five preceding years of assessment.
Failure to meet any of the above three requirements will mean a failure to satisfy the physical presence test. Additionally, any person who does meet the physical presence test requirements but is outside South Africa for a continuous period of at least 330 full days, will not be regarded as a resident, effective on the day that person physically left the Republic.
Double Tax Agreements and Tax Residency in SA:
If you are a South African tax resident earning money abroad, the existence of a Double Tax Agreement between the two countries may influence the outcome of your tax residency status. Find out more about DTAs, here including a full list of countries that have a DTA with South Africa.
What are your options if you are a South African Tax resident earning money abroad?
You may qualify for expat tax 2020, which sees your worldwide income taxable in South Africa up to 45% after the first R1.25 million in employment income.
What do you need to do to qualify for the R1.25 mil expat tax exemption?
South African tax residents employed abroad may be eligible for tax relief (the foreign employment income exemption contained in sec 10(1)(o)(ii) of the Income Tax Act), if the following requirements are met:
- The exemption applies only to certain types of employment services rendered abroad if you are outside the Republic for longer than 183 days in aggregate during any twelve-month period, starting or ending in a tax year, 60 days of which must be continuous.
- This exemption can only apply to employment income earned from 1 March 2020 onward and is capped at the first R1.25 million earned abroad.
What are your options if you are a non-resident for tax purposes in South Africa?
If you are deemed to be neither ordinarily resident, nor physically present in South Africa, you will be regarded as a non-resident for tax purposes. This means you will only be taxed on income that has its source in South Africa, like interest and rental income.
What are the consequences of becoming non-resident in South Africa for tax purposes?
You might not have to pay expat tax on your worldwide income in South Africa, but you’ll also be deemed to have made a disposal of all your worldwide assets for capital gains tax purposes, once you terminate your South African tax residency. Yikes. That is a big deal!
What does this mean? It means that aside from your South African immovable property, you are deemed to have sold off all your worldwide assets, which means that SARS is then allowed to tax you one last time before you leave. This also means that if you have broken your tax residency because you’ve ceased to meet the requirements of either the ordinary residence or physical presence tests, you’ll have triggered a capital gains tax liability to SARS, which is not going to disappear on its own, even if you ceased to be a resident for tax purposes some time ago.
If your tax residency has terminated, you must notify SARS
Fortunately you don’t have to notify SARS in person; you can do it online. The eFiling wizard will ask whether you have “ceased to be a tax resident” and you can simply confirm this and provide the date from which it was effective. If you don’t want to do it this way, you could even give SARS your breakup notification when you apply for a tax clearance certificate on eFiling when you emigrate from South Africa.
Side note: If you find yourself in this position, where you have ceased to be a tax resident and a capital gain was so deemed and you did not declare it to SARS at the time, it’s not too late. Provision has been made through the Voluntary Disclosure Programme, giving you the means to minimize potential penalties and prevent prosecution.
Still confused? That’s where FinGlobal comes in.
We’ve built a solid reputation on providing South African expats with a full suite of financial services for all their cross-border financial and tax requirements. We’re ready to help South Africans living and working abroad to make the best decisions for their future, which means we offer holistic, tailored assistance with:
- Financial emigration/formal emigration
- Tax exit/Ceasing tax residency
- Retirement annuity withdrawal/encashment
- Tax clearance certificates
- Expat tax
- Foreign exchange
- Pension income
- Inheritances, and more.
Delivering convenience and confidentiality every step of the way
- All of our services can be delivered remotely, and we handle everything for you.
- You can expect to receive completed, signature-ready documentation for your approval and let us handle the paperwork process every step of the way.
- We offer value with highly competitive exchange rates and expert advice.
- We stand for exceptional efficiency with a 100% success rate in everything we do.
If you’d like to speak to an expert about your tax emigration or expat tax questions, Contact us today!