If you’re a South African living and working abroad, it’s likely that you’re weighing up your options when it comes to tax emigration after the changes brought into effect by the Taxation Laws Amendment Act in March 2020. According to these changes, South Africans abroad are to be taxed on their worldwide income where it exceeds R1.25million per annum, and this so-called “expat tax” has many South Africans debating the pros and cons of tax emigration.
Do South Africans working abroad pay tax in South Africa?
In line with a residence-based tax system, South African residents are taxed on their worldwide income (subject to limited exceptions) regardless of where it is earned, while non-residents are taxed only on income sourced in South Africa. Tax systems vary by country, which means that as a South African tax resident abroad there is a chance of being taxed on the same income twice.
The nasty possibility of double taxation is often alleviated by tax relief contained in various Double Taxation Agreements (DTAs) – inter-country agreements that deal with potential competing taxation rights against the same taxpayer’s income. Any person who is exclusively a tax resident of another tax jurisdiction in terms of a double taxation agreement (DTA), will not be regarded as a South African tax resident. In other words, if you pay tax in a foreign country, that tax can either be deducted against South African tax payable or excluded from South African income tax, depending on the terms of the DTA. However, where there is no such DTA the tax resident will be taxed on foreign income above the R1.25 million exemption threshold.
So what are your options now as a South African living abroad? According to the Taxation Laws Amendment Act, you have two choices essentially:
- Remain a South African tax resident, temporarily abroad, and continue to pay expat tax back home in order to maintain tax compliance.
- Cease your South African tax residency, and become a tax non-resident with the South African Revenue Services (SARS).
Option 1: South African tax resident temporarily abroad, who maintains tax compliance
First, it is necessary to ascertain whether you are considered a tax resident or not. A natural person will be considered tax resident in one of two ways:
- You are either considered “ordinarily resident” in South Africa (usually born and raised) or you are a tax resident by physical presence.
- To meet the “physical presence test”, you must have feet on South African soil for more than:
- 91 days in the current tax year;
- 91 days in each of the five tax years prior; and
- 915 days in those 5 previous tax years.
It is necessary to meet all three time-related requirements in order to be considered tax resident by virtue of the physical presence test.
Read more about the application of the ordinarily resident and physically present tests in order to determine tax residency status.
Your obligations as a South African tax resident abroad:
- File your tax return in South Africa, using eFiling. In your return you will declare all your worldwide income and capital gains, as well as your South African sourced income and gains.
- The foreign income exemption is not automatic, so you must prove that you are eligible, and you will have to declare all foreign income in your South African tax return, including the tax exempt portion.
Obtain and maintain tax clearance from SARS, to show you are in good standing. You will need this clearance in order to utilise your foreign investment and single discretionary allowances if you wish to move money out of South Africa.
Option 2: Complete tax emigration from South Africa and become tax non-resident
What is tax emigration from South Africa?
Tax emigration is the process of informing SARS that you are moving tax jurisdictions. In doing so, you request that SARS stop treating you like a tax resident for income tax purposes; viewing you instead as a non-resident because you are now a tax resident elsewhere.
What are the tax implications of emigrating from South Africa?
When you exit the South African tax system by informing SARS that you are no longer a tax resident, they take one final opportunity to tax you before you leave. Aptly known as an “exit charge”, there is a deemed disposal (at market value) of all your worldwide assets, the day before your status changed and a Capital Gains Tax becomes payable to SARS.
How do you change your tax residence status with SARS?
- In your tax return for the tax year in question, using eFiling.
Since 2017, taxpayers have been required to report their current or change in tax residence status to SARS in their Individual Annual Income Tax Return (ITR12), but not necessarily the date on which it changed. Recent changes were made to the ITR12 for the 2020/2021 tax year, which can be used to indicate the date on which you ceased to be a tax resident of South Africa. Once this has been submitted, it will be automatically flagged for manual intervention, at which point SARS will request supporting documentation from you in order to verify your declaration that you no longer qualify as a tax resident.
- Submitting the “Declaration of Cease to be a Tax Resident” to a dedicated SARS mailbox.
When using email as your form of communicating your SARS breakup, you must submit all the required documentation at the same time. You would use this method if you:
- Have previously informed SARS that you ceased to be a tax resident and would like confirmation from SARS, or
- Did not inform SARS that you ceased to be tax resident in a prior tax year and would now like to place this on record.
All taxpayers are required to comply with the new requirements imposed by SARS. This means you will need to prove you have ceased your South African tax residence status. The “Declaration of Ceasing to be a Tax Resident” will be denied by SARS if:
- You do not meet the criteria for ceasing to be tax resident; or
- You cannot provide SARS with the relevant materials or the correct relevant materials as requested.
Did you know? Once you’ve completed tax emigration and maintained your non-resident status for a period of three years, you can move your Retirement Annuity funds out of the country. Want to chat about RA encashment? Got a question about tax emigration? Leave us your contact details and we’ll be in touch to discuss your options.