Leaving on a jet plane, don’t know if you’ll be back again? Don’t forget to clarify your tax residency

Your bags are packed and you are ready to leave South Africa; Table Mountain is in your rear-view mirror and you are excited about the new opportunities in your new homeland.

Moving to another country is daunting, and as if the administrative burden of packing and ensuring all your visas are in place is not enough the tax man (aka SARS) wants to ensure you have another item on your to-do list – informing them of your change in tax residency.

What is tax residency anyway?

SA, like most other countries, has a residency basis of taxation. This means that how tax residents and non-tax residents are taxed differs. Tax residents are subject to tax on global income and gains, i.e. whether earned in SA or not, while non-tax residents are only subject to SA tax on income and gains that are from (or deemed to be from, a horror story for another day) a source in SA.

You can be regarded as being a tax resident in SA in one of two ways, firstly by being regarded as ordinarily resident, in a nutshell meaning you see SA as your real home and the place where you have the closest family, business, and social ties. The ordinarily resident test will predominantly apply to SA nationals and people born in SA. Secondly by way of the physical presence test, which depends on the number of days you actually spend in SA over a period of six years. The physical presence test is more likely to apply to individuals that come to SA to live and work or people that are returning to SA after a long period of absence.

Can a Tax Treaty determine residence?

Even if SA considers a person resident there based on either of the above, there is an exclusion whereby if a person is regarded as exclusively tax resident in another country in terms of a Double Taxation Agreement (“DTA” or tax treaty) which such country has with SA, such person will not be tax resident in SA. For the DTA to apply, you would however have to be regarded as being resident in the other country, in most instances, that would be after you have spent 183 days in the other country. The requirements of the tie-breaker clauses in the relevant DTA will have to be evaluated to determine to which country your residency status would tie-break to, but four aspects are usually evaluated. When one of the tiers of the tie-breaker test has been met, it is not necessary to consider further tiers. The first tier looks at where the person has a permanent home available to them, the second is where the person has their centre of vital interest (i.e. family and social relations, occupation, and political, cultural, or other activities). Thirdly the person’s habitual abode (the place where they reside for the most time) is considered and lastly their nationality.

What happens when you cease tax residence in SA?

Now that we know how and when you would be regarded as being resident in SA, what should you do when you are moving and no longer want to remain a tax resident? Where a person ceases to be a tax resident in SA, SARS gives a final parting gift by applying an “exit charge”.  Thus, emigrants are taxed as though they had disposed of all their assets (excluding immovable property in SA, personal use assets, and unvested share options) at market value on the day before emigration. The effect of the above is that a taxpayer ceasing tax residency will be subject to SA capital gains tax (“CGT”) on the deemed disposal of certain assets. And while paying tax is never fun, paying tax on pretend income, i.e. an imagined disposal of all your assets, is pretty depressing.

And how do you formally cease to be a tax resident in SA? A SA resident taxpayer has three options, firstly to declare they ceased being tax resident when filing their tax return, alternately by way of updating their registered particulars on E-Filing, or should the taxpayer not have an EFiling profile by completing a declaration form and sending it to SARS via email.

Considering a relocation and are concerned about the tax compliance that accompanies the process? Or are you unsure of how you would be taxed in the other jurisdiction? Reach out to us and we will take the headache out of your tax compliance matters.