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Taxing matters: a guide to understanding South African tax residency for expats

By December 6, 2023FinGlobal

Taxing matters: a guide to understanding South African tax residency for expats

December 6, 2023

south-african-tax-residency

Many South Africans think that the act of physical emigration is sufficient to sever all ties with their home country. Unfortunately, this is not the case. While you might have sold your home, packed up your possessions and moved far, far away, you will never get far enough to escape the reach of the South African Revenue Service. (SARS). Your tax residency (and its tax obligations) is not something you can leave behind when you depart. As such, South Africans who have already left the country (and those who are still planning to leave) must ensure they are correctly informed about their tax resident status with the revenue authority as well as the tax implications of their permanent emigration if they’re to avoid double taxation on their income earned abroad when they reach the other side.

South African tax residency: what does it mean?

The South African Revenue Service runs a residency-based system of taxation. According to this system, if you meet the requirements of tax residency, you will be taxed on your foreign employment income and your South African sourced income even if you no longer physically live in South Africa.

In 2020, new tax laws were introduced in South Africa. According to these new rules, expats (who could previously apply for exemption from paying tax on their foreign employment income in its entirety) were brought back into SARS’ tax net. From this point on, South Africans living and working abroad would be taxed on their worldwide income if they still met the requirements for tax residency and had not deregistered with SARS.

How do you determine residency for tax purposes in South Africa?

SARS uses two tests in order to determine tax residency in South Africa:

  1. The ordinarily resident test: a subjective assessment that examines the circumstances surrounding an individual’s relocation in order to draw a conclusion about whether or not they intend to be a tax resident of South Africa.
  2. The physically present test: an objective assessment that considers the amount of time a person has spent in South Africa in order to determine whether they meet the time-based criteria to be considered a tax resident of South Africa.

If you do not meet the requirements of the ordinarily resident test, you can still be considered a tax resident by way of physical presence.

Read more: Breaking tax residency with SA: when to apply the physical presence or ordinary residence test.

What are the tax implications of emigrating from South Africa?

Once you have physically emigrated, you are still considered a tax resident until you formally notify SARS that you no longer meet the requirements for tax residency and request that they update your status from resident to non-resident for tax purposes. This formal procedure, known as tax emigration, is the only way to cut your tax ties with the revenue authority.

Until you become eligible to complete tax emigration you will still be treated as a South African tax resident by SARS, which means you will need to file a tax return that declares your foreign employment income, so that you can be taxed on it. This has become known as ‘expat tax’. You must also apply to use the foreign employment income exemption if you wish to have up to R1.25 million of your worldwide earnings treated as tax exempt, provided you meet the criteria for using this exemption. If you qualify for tax relief under a Double Tax Agreement, you’ll also need to use this in order to avoid being taxed twice on income earned abroad.

Once you start the process of tax emigration, it is important to note the implications thereof. Upon terminating your tax residency with SARS, the revenue authority takes one last opportunity to tax you before allowing you to exit the tax system. Tax emigration is a trigger event for Capital Gains Tax (CGT), and what this means is that SARS treats you as if you sold off all your worldwide assets (excluding immovable property in SA) the day before you departed the country, at market value on that date. This CGT has become known as exit tax and it becomes payable as soon as you become a non-resident for tax purposes.

After you have completed tax emigration and you have settled your exit tax liability with SARS (if any), having satisfied SARS that you no longer meet the requirements for tax residency means that you should be issued with a Non-Resident Confirmation Letter from SARS. You will then need to deregister your tax number with SARS, in order to be certain that your tax obligation with South Africa is properly terminated. Aside from closing off your tax relationship with SARS on your worldwide income, there are other benefits to becoming a non-resident for tax purposes after you emigrate. One of the top reasons for changing your tax status is that you become eligible to cash in your retirement annuity after maintaining your non-resident tax status for a minimum of three years. This is often the final step necessary for most South Africans to conclude the emigration of their finances.

FinGlobal: tax emigration specialists for South Africans overseas

Handling your tax compliance through the emigration process can be tricky, especially if you’re balancing compliance in two different jurisdictions while trying to minimise the risk of double taxation. To stay on the right side of SA’s new income tax laws, it is important to follow the correct procedures and have the necessary supporting documentation in place. FinGlobal can assist you with every step of your tax emigration, including maintaining expat tax compliance and gaining tax clearance in order to migrate your finances abroad once you’ve cashed in your retirement annuities.

For more information on our comprehensive, secure cross-border financial services for South Africans abroad, please leave your contact details below and we’ll be in touch to discuss your requirements.

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