Many South Africans working abroad for foreign employers are now questioning whether they should retain their tax residency in South Africa. One of our most frequently fielded questions when it comes to expat tax matters is: when should a South African expat consider ceasing tax residency, if at all? This tax year was the first year in which expats were no longer fully exempt from paying tax back home on their foreign income, and this additional tax burden has led many to question how to cut ties with the South African Revenue Service.
While individuals who are not tax residents are exempt from expat tax in SA on their foreign income, what does it mean to cease your South African tax residency? Let’s take a look at five things you need to know before you exit the South African tax system.
Tax emigration South Africa
The question of leaving the South African tax net revolves around expat tax
Thanks to changes to the South African Income Tax Act, tax residents are taxed on their worldwide income. Before March last year, expats living and working abroad could claim complete exemption on their foreign employment income, provided that they met the necessary time-out-of-country requirements. After March 2020, this foreign income exemption was amended to cap the exemption at R1.25 million, which results in foreign income over this threshold becoming taxable (at the individual’s marginal rate) while residents still need to comply with the 183/60 day requirement in order to utilise the capped exemption.
Tax emigration replaces formal emigration
These changes to South African income tax law mean two things:
- Formal emigration is being replaced with tax emigration, and it will no longer be the domain of the South African Reserve Bank. Instead, the South African Revenue Service will handle residents exiting the tax system through tax emigration.
- South Africans can no longer use formal emigration as a means to cash in their retirement annuity early, instead they must now show that they are no longer tax resident and that they have maintained this position for at least three years.
Tax emigration is your ticket out of a residence-based tax system
South Africa has a residence-based tax system, which means that South Africans living abroad who are considered residents will be taxed back home on their worldwide income (aside from a few exclusions) and asset base, while non-residents are only taxed on income with a South African source. By completing the process of tax emigration, you are effectively notifying SARS that your tax status has changed, and that they can no longer expect to tax you because you are now a tax resident elsewhere.
- Who is a tax resident and who is a tax non-resident?
- The Income Tax Act defines a resident for tax purposes and these subjective criteria are applied by the South African Revenue Service to determine whether you should be paying tax. Determining your tax residency involves looking at details like how much time is spent in South Africa, where your assets are held and where your family lives.
There are two main reasons why people undertake tax emigration from South Africa
- To change your status to non-resident and avoid paying expat tax on your worldwide income.
- To access your retirement savings before the age of 55.
Before you undertake tax emigration, it is important to note that you should only cease tax residency if you have no intention of returning to South Africa at some point in the future. You will notify SARS of your change in circumstances and request that they acknowledge your status change from resident to non-resident. This assessment is conducted on a case-by-case basis, and all the evidence and circumstances that surround your declaration must indicate that you do not intend to return.
Steps to change your tax status to non-resident: this involves two tests
- The ordinarily resident test: While this test is subjective, meeting the requirements of this test means that you will be considered a tax resident. This is the case where SARS has determined that South Africa is in fact the home to which you will ultimately return at the end of your wanderings.
If you fail to meet this test, you can still be considered a tax resident if you satisfy the physical presence test. Read more about the ordinarily resident test and how it is applied.
- The physical presence test: This is an objective examination of the time you spend on South African soil. The physical presence test is applied where you fail to meet the requirements of the ordinarily resident in South Africa during the tax year under assessment.
In order to evidence that you have no intention of being a South African tax resident, it’s critical that you pay close attention to the time limitations. Exceeding these time frames can push you over the edge into tax residency, so you should avoid spending longer than
- 91 days collectively in the tax year under assessment;
- 91 days collectively in each year of the five tax years prior to the tax year under assessment; and
- 915 days collectively during the previous five tax years (which works out to roughly 183 days in one year).
Staying under these time limits means that you will be considered a non-resident for tax purposes. Read more about the physical presence test and how it is applied.
You will be charged Capital Gains Tax on your tax exit from South Africa
Before undertaking tax emigration from South Africa, you’re going to want to assess your situation carefully. Ceasing tax residency will trigger a deemed disposal of your worldwide assets for capital gains tax (CGT) purposes, and the tax cost associated with this is either material or immaterial:
- Material: where you own assets that trigger the deemed CGT provisions. In other words, it’s time to cough up one last time for SARS before you leave.
- Immaterial: where you owned no assets at the time when you ceased to be a South African tax resident. In other words, if SARS has nothing to tax you on then the cost is immaterial, or zero.
Implications of tax emigration from South Africa
- When you cease tax residency, an exit charge is triggered and this becomes payable to SARS immediately. This exit tax is calculated on your assets that are deemed to have been sold at market value the day before you changed to non-resident.
- This exit charge applies to all remaining South African and other worldwide assets, with the exception of immovable property.
Read more about Capital Gains Tax and tax emigration.
FinGlobal: tax emigration expertise at your disposal
Confused about your tax residency status and how to handle your tax compliance in two different tax jurisdictions? That’s where FinGlobal comes in to whisk away all your worries – whether it’s tax compliance, tax refunds, tax clearance certificates or tax emigration, we are the go-to tax experts for South African expats.
Leave us your contact details and we’ll be in touch to start your 100% free, confidential, no-strings-attached SARS residency assessment.