South Africa has a residence-based taxation system. This means that South Africans (even if they’re living overseas) will be taxed on their income by the South African Revenue Service (SARS) if they are deemed to be resident for tax purposes. Previously South Africans living and working abroad could apply for tax exemption on their foreign earnings, but the introduction of “expat tax” in 2020 has changed this. Now, South African tax residents earning abroad can only enjoy tax exemption on their worldwide earnings up to the first R1.25 million earned, after which they are taxed on the remainder of their pay cheque. How can one avoid paying this expat tax? Tax emigration. In other words, once you have ceased to be a resident for tax purposes, you will no longer be expected to pay SARS because non-residents are not taxed in South Africa.
Non-resident South Africa
Why does tax residency status matter if I live overseas?
Thanks to the new expat tax law, a South African tax resident who is an employee rendering employment services outside the Republic for 183 full days (which includes a continuous period of 60 days) during any 12-month period will be expected to give SARS a cut of their hard-earned money. Effective 1 March 2020, any remuneration received in excess of R1.25 million is now subject to normal income tax in South Africa, irrespective of whether tax is paid in another country.
What is a non-resident for tax purposes?
For tax purposes, a non-resident is someone who does not satisfy either of the residency tests. In order to determine whether they’re empowered to tax you, SARS must first determine whether you are considered a resident for tax purposes.
Tax matters in South Africa: am I a resident or a non-resident?
In South African tax law, a resident is defined by the Income Tax Act, 1962, through use of the “physical presence test” and an ordinarily resident test that has been defined in terms of our common law. Any person who is ordinarily resident in South Africa during the year of assessment or, failing which, meets all three requirements of the physical presence test, will be regarded by SARS as a resident for tax purposes.
You will be considered “ordinarily resident in South Africa” if:
- South Africa is the country to which you will eventually and naturally return to at the end of your wanderings. (Home is where you hang your hat, after all!)
- South Africa could be described as your usual or principal residence, or real home.
“Ordinarily resident” is not a clearly defined concept; instead, it depends on a factual inquiry, which can only be conducted on a case-by-case basis. If you claim not to ordinarily reside in SA, all of your actions and surrounding circumstances must support this claim. You must have no reason or intention to return to South Africa.
What factors does SARS consider when determining whether you are a non-resident for tax purposes?
The factors which may be taken into account by officials to determine whether an individual is ordinarily resident for tax purposes in South Africa include your most fixed and settled place of residence, your place of business and personal interests, family and social relationships, including schools, places of worship and so forth.
Even if you are not ordinarily resident in South Africa, there’s a chance you’ll still meet the requirements of the physical presence test and can still be deemed to be a resident for tax purposes in that way.
To meet the requirements of the physical presence test, you must be physically present in South Africa for –
- 91 days in total during the year of assessment;
- 91 days in total during each of the five years of assessment before the year of assessment; and
- 915 days in total during those five previous years of assessment.
Failure to meet any three of these requirements will mean that the physical presence test is not met. Furthermore, if you do happen to meet the physical presence test, but you’ve been outside South Africa for a continuous period of at least 330 full days, you will be regarded as a non-resident from the day on which you ceased to be physically present.
As a result, if you are neither ordinarily resident, nor do you meet the requirements of the physical presence test, you will be regarded as a non-resident for tax purposes. This means that you will be expected to pay tax only on income sourced in South Africa, such as interest income, rental income or services rendered in South Africa.
What happens when you’ve ceased to be a resident of South Africa for tax purposes?
Once you are declared a non-resident for tax purposes, you are deemed to have sold off all your worldwide assets for capital gains tax purposes. That’s right. Ceasing your tax residency in South Africa triggers an exit tax, in the form of capital gains tax liability to SARS, even if there was no sale on your assets. If a capital gain was so deemed and you did not declare it, you are still able to do so now through the Voluntary Disclosure Programme to eliminate any potential penalties and prevent prosecution.
Read more about what happens when you cease to be a tax resident in South Africa.
FinGlobal: a trusted tax partner for South African expats
When your finances are spread over two countries, tax can get tricky. To avoid surprise penalties, it’s best to stay on the right side of the law when it comes to SARS. If you’re unsure whether expat tax applies to you, or you’d like to avoid being taxed double on your income, FinGlobal can help. Whether it’s tax clearance certificates, tax refunds, tax returns or tax emigration, we can help you every step of the way. To find out more about our expert tax services for expats, leave us your contact details and we’ll be in touch to start your confidential, no-obligation SARS assessment.