South Africa has a residence-based tax system, in which residents are taxed on their worldwide income, irrespective of where their income was earned. This means that even if you don’t necessarily live in South Africa, if you are still considered a tax resident, you are liable for tax on income earned locally and abroad. On the other hand, non-residents are taxed only on income with a South African source. Confused? Let’s break it down.
Who is a tax resident in South Africa?
South African law recognises various types of residents, including residents defined by the Income Tax Act, 1962, using the physical presence test which is a statutory, time-based standard, and those who are ordinarily resident according to the South African common law standard.
You will qualify as a South African tax resident if you meet the requirements laid down through common law for the ordinarily resident test. Ordinarily resident status is attributed to individuals whose natural inclination is to return to South Africa after their travels. It signifies their primary or usual place of residence, their true home. If an individual is not ordinarily resident in South Africa, they may still meet the criteria of the physical presence test, thereby being deemed a tax resident.
All that the physical presence test requires is that the individual be physically present in the Republic for no less than:
- A total of 91 days during the relevant tax year
- 91 days in total during each of the preceding five tax years
- A cumulative total of 915 days during those five prior tax years
However, it is necessary to meet all three criteria in order to qualify. This means that it is possible to break the physical presence test simply by remaining outside of South Africa for at least 330 full days after permanent relocation. Such individuals will no longer technically qualify as residents by virtue of the physical presence test from the day they ceased to be physically present.
- Breaking tax residency with SA: when to apply the physical presence or ordinary residence test.
- Double tax warning for emigrating South Africans – what you need to know.
Who is a non-resident for tax purposes in South Africa?
If an individual meets neither the ordinarily resident nor physically present tests, they should be classified as non-resident for tax purposes. This designation means that the individual will be subject to tax only on income originating within South Africa, such as interest earned from a South African bank, rental income from a South African property, and income generated from services provided in South Africa.
How to become a non tax resident of south africa
As a South African tax resident, the switch in status from resident to non-resident is not automatic when you leave the country. If you permanently relocate from South Africa, it is your duty to inform the South African Revenue Service (SARS) accordingly, and to initiate the process by which your South African tax residency is terminated – tax emigration. Until you have notified SARS that you no longer meet the requirements of either the ordinarily resident or physically present test, they are entitled to assume that you are still a resident, and to tax you accordingly. This means that you are also expected to file a tax return in South Africa and declare all of your income, local and foreign.
How are residents taxed in South Africa?
Residents are taxed on the following types of income, regardless of where it was earned:
- Employment income, including salaries, bonuses, commissions, and fringe benefits
- Business income
- Earnings from investments, like interest, dividends, and rental income.
- Capital gains
There are certain exclusions to this rule, such as foreign employment income that can be exempt based on the 183-day rule (this tax relief allows for South African residents to have up to R1.25 million of their foreign earnings excluded from their taxable income) and foreign income that is specifically exempt according to the provisions of a double taxation agreement (DTA).
Taxation of Non-Residents in South Africa
Non-residents are taxed on only their income from a South African source. This includes income derived from employment, business, investments, and capital gains
The following types of income are considered to be from a South African source:
- Employment income earned in South Africa
- Business income derived from an entity with a permanent establishment in South Africa
- Investment income paid by a South African resident or from a South African source
- Capital gains from the disposal of assets located in South Africa
Withholding tax on non-residents
On certain types of payments, South Africa imposes a withholding tax on non-residents, meaning that they are charged a form of income tax in advance. This withholding tax applies to:
- Management fees
- Professional fees
Non-residents may be able to claim a tax refund where their actual tax liability is lower than the withholding tax.
Non-residents and Double Taxation Agreements (DTA)
South Africa has DTAs with a number of countries. These DTAs help to prevent double taxation by providing for relief from income tax on certain types of income earned in one country by a resident of the other country. The specific tax treatment of residents and non-residents will vary depending on the individual’s circumstances and the type of income they are earning, and the DTA that applies between South Africa and the host country.
FinGlobal: cross-border financial specialists for South African expats around the world
Clarifying your tax status with the South African Revenue Service after you have emigrated is essential in order to avoid being taxed on your worldwide income. FinGlobal can assist you through the process of ceasing your tax residency through tax emigration, walk you through withdrawing your retirement annuities and help you make a seamless transition to your new home overseas.
To put FinGlobal’s hassle-free, convenient services to the test, leave your contact details below and we’ll be in touch to discuss your requirements.