
Many South Africans find themselves straddling two worlds – their new country of residence and the one they left behind. While many emigrated with no intention of returning, some left undecided. As such, many expats with assets remaining in South Africa now ask: should you complete tax emigration if you live abroad but still have assets in South Africa?
Let’s answer this question with a scenario and then unpack tax residency in South Africa, and its impact on remaining assets.
Scenario: Werner lives and works in the Netherlands, obtaining residency around 2019. He has purchased property there and has no plans to return to South Africa except for family visits. However, Werner still owns property in South Africa that is being rented out and holds money in a fixed deposit, earning interest. Should Werner go through the tax emigration process, or can he continue submitting tax returns on his South African income?
Werner’s situation is typical for South Africans who have relocated abroad. While he may have established residency in the Netherlands, his continued ties to South Africa, mainly through property ownership and financial assets, make his tax situation complex.
Understanding tax residency in South Africa
South Africa has a residency-based tax system. This means that individuals are taxed on their worldwide income if they are considered tax residents of South Africa. Who is a tax resident in South Africa? This gets a little complicated since you don’t have to live in South Africa full-time to count as a tax resident.
SARS uses two tests in determining tax residency in South Africa:
1. Ordinary residence test: This is a subjective and complex legal concept that considers various factors to determine the individual’s “real home” or the country to which they would naturally and habitually return.
Factors considered:
- Family ties
- Property ownership
- Employment
- Social and economic ties
- Intention to return
2. Physical presence test: This objective test counts the number of days spent by an individual inside the borders of the Republic.
- 91-day rule: If an individual spends more than 91 days in South Africa in the current tax year and each of the previous five years and more than 915 days over those five years, they’ll be considered a tax resident.
- 330-day rule: However, if you spend 330 consecutive days outside of South Africa, you’ll cease to be a tax resident from the start of that period.
Read more: Breaking tax residency with SA: when to apply the physical presence or ordinary residence test.
A tax resident meets either requirement of the two residency tests used by SARS. However, no longer meeting the residency test requirements does not automatically mean that an individual is a non-resident. An individual is still considered a tax resident until they have officially changed their status with SARS by completing tax emigration. As such, an individual can only become a non-resident for tax purposes after successfully ceasing tax residency with SARS through tax emigration.
Read more: The dangers of not completing tax emigration after you leave South Africa.
The implications of tax emigration from South Africa
If Werner were to cease tax residency in South Africa, it would have several implications:
Deemed disposal of assets: Werner would be considered to have disposed of all his assets, except for immovable property situated in South Africa. This could trigger capital gains tax (exit tax) on the deemed disposal of these assets. The property is unaffected by tax emigration as SARS will collect their cut when the property is sold.
Read more: Selling your property in South Africa – the guide to expat Capital Gains Tax implications.
Non-resident tax status: Once he ceases to be a tax resident, Werner would only be liable for tax on his South African-sourced income, such as rental income from the property and interest from the fixed deposit.
Read more: How are residents and non-residents taxed in South Africa?
The exchange control implications of not completing tax emigration
Werner must comply with South Africa’s exchange control regulations when transferring funds out of the country. It gets tricky because exchange control regulations require that individuals provide proof of tax residency when making international transfers.
For expats, this proof must be in the form of a SARS Non-Resident Confirmation Letter. Without this letter, he will find it challenging to sell his South African property or cash in the fixed deposit account and transfer the proceeds out of the country.
As such, it is in Werner’s best interest in this scenario to choose tax emigration sooner rather than later. Thereafter, he can continue to file non-resident tax returns and pay tax only on his South African-sourced income as long as he holds those assets.
Read more: Why tax emigration makes sense even without financial ties to South Africa.
FinGlobal: tax emigration specialists for South African expats
Are you confused about your South African tax residency? Let FinGlobal help! Our team of expert cross-border financial planners and tax advisors can guide you through the complexities of South African tax emigration. Whether you’re looking to clarify your tax residency status, streamline your tax affairs, handle tax clearance and tax refunds, or execute your retirement annuity withdrawal – we’ve got you covered. We can even help you get your SARS Non-Resident Confirmation Letter!
Ready to take the next step? Leave your contact details below, and we’ll contact you to discuss your specific needs.