How are residents and non-residents taxed in South Africa?

In preparing for your international relocation, it’s important to know what to expect tax wise. As a South African tax resident, you are taxed on both your worldwide income (above the R1.25 million exemption threshold) and locally-sourced income. But this changes when you break tax residency with South Africa. What do you need to know about changing your tax status from resident to non-resident, and the implications on your tax affairs? Let’s break it down for you.

Tax residence

What is the meaning of tax residence in South Africa?

Just to paint the background picture, South Africa has a residence-based tax system. What this means is that residents are subject to one set of rules for tax, while non-residents are taxed differently. Seems simple enough, right? Not so fast. You can live outside of South Africa and still be considered a South African tax resident, which means (among other things) that you’ll be expected to pay expat tax back home.

How does that work? Let’s take a moment to consider tax residency and how to determine whether you’re a tax resident or not.

Who is a tax resident in South Africa?

According to South African law, a resident is described by the Income Tax Act of 1962 as either:

• An individual who meets the physical presence test or
• An individual who is ordinarily resident according to the common law definitions.

As mentioned, tax residence does not depend on your migration status. In other words, regardless of the passport you carry, tax residence in South Africa boils down to the two domestic tests prescribed by the Income Tax Act.

• The physical presence test involves a calendar counting exercise in terms of which you will be considered a South African tax resident if you’ve been present in the Republic for at least 91 days every year for 6 tax years, and that the days spent in the country in total over this period amounts to at least 915 days in total. If this test is met, you will be tax resident from the first day of the last year forming part of the 6-year period referred to.
• The requirements of the physical presence test can be broken by remaining outside of the Republic for a minimum of 330 full calendar days.
• The ordinarily resident test looks at the circumstances surrounding your residence. You are considered ordinarily resident in the country to which you would return naturally and as a matter of course, once your globe trotting is done.
• The test involves a facts-based and substantive inquiry that in essence involves examining realistically: Where do you consider your home to be?

What is a tax resident temporarily abroad?

A South African resident currently living and working abroad, with no intention to permanently relocate. As mentioned above, tax residents must pay tax on their foreign employment income back in South Africa, subject to the R1.25 million exclusion.

What tax does a resident pay in South Africa?

If you are found to be a tax resident, you will be expected to pay tax on income earned in South Africa and abroad. Therefore, this must be declared in a tax return submitted every year to the South African Revenue Service (SARS).

What tax relief do South African tax residents qualify for?

Section 10 of the Income Tax Act specifies how foreign employment remuneration is eligible for exemption from income tax. The annual threshold for this exemption is R1.25 million, which includes the value of employment package benefits, such as accommodation, travel allowances, security and the like. You can use the R1.25 million exemption to exclude up to R1.25 million from your South African tax liability if you fulfill the following requirements –

1. You have a formal contract of employment (i.e: no freelancers or entrepreneurs)
2. You are a South African tax resident
3. You earn a certain type of remuneration
4. You spend no less than 183 days (+/- 26 weeks/6 months) in a consecutive 12-month period outside of SA providing services for a foreign employer, and
   • Of these 183 days, at least 60 of them must be consecutive.

Please note:

• The foreign income exemption does not apply automatically. You must file a tax return back in South Africa, declare all income and request that the exemption be applied in your favour.
• This will mean having to verify that you meet the requirements to utilise this relief, which is then deducted from your liability to SARS in the form of a tax credit.

How do you become a non-resident for tax purposes in South Africa?

It is possible, once you’ve left South Africa, to cut your ties with SARS. The process of tax emigration changes your status from resident to non-resident for tax purposes.

Read: Should I cease South African tax residency if I have relocated abroad?

What tax does a non-resident pay in South Africa?

Non-residents are taxed on income earned in South Africa, unless there is a Double Tax Agreement that says otherwise. Non-residents are also taxed on:

• Pension/retirement annuity income paid out in South Africa
• Rental income on a South African property
• Capital Gains Tax on certain asset classes

FinGlobal: trusted cross-border financial specialists

Confused about your tax residence status? FinGlobal will ensure you’re always on the right side of tax law. Whether you’re a tax resident abroad wanting to maintain tax compliance in South Africa, or you want to complete tax emigration and cut your ties with SARS, we can help.

We’ve assisted clients from 105 countries with various aspects of their cross-border financial portfolios, and we’re ready to provide the same convenient, reliable service to you.

Got a complicated tax situation? We’d love to hear about it. Leave your contact details and put us to the test.