Over the past decade, thousands of South Africans have ceased South African tax residence as part of a broader international relocation strategy. Many of these individuals have since established lives, careers and businesses abroad. However, an increasing number are now considering a return to South Africa, whether for family, lifestyle, business or retirement reasons.
While a return to South Africa may appear straightforward from an immigration perspective, the tax implications are often significantly more complex. A common misconception is that a South African citizen automatically becomes South African tax resident again upon arrival. In reality, determining when tax residence is re-established requires a detailed analysis of the individual’s circumstances, the domestic tax residence rules, and potentially the provisions of an applicable double taxation agreement (“DTA”).
Understanding these rules can create valuable planning opportunities, but it is equally important to understand the risk that SARS may challenge whether the individual ever successfully ceased South African tax residence in the first place.
What is Tax Emigration?
he term “tax emigration” is commonly used to describe the process whereby an individual ceases to be a South African tax resident.
South Africa taxes tax residents on their worldwide income and gains. Non-residents, by contrast, are generally taxed only on South African-sourced income and gains from certain South African assets.
An individual ceases to be tax resident when they are no longer:
- Ordinarily resident in South Africa; and
- Present in South Africa for sufficient periods to satisfy the physical presence test.
The determination is ultimately based on facts and circumstances and requires consideration of factors such as where the individual’s permanent home is located, where their family resides, where their economic interests are centred, and their long-term intentions.
The Exit Tax
When an individual ceases South African tax residence, they are generally deemed to dispose of most of their worldwide assets at market value on the day before they become non-resident.
This deemed disposal triggers a capital gains tax (“CGT”) event commonly referred to as the “exit tax”.
The purpose of the exit tax is to ensure that gains which accrued while the individual was a South African tax resident do not permanently escape South African taxation.
Certain assets are excluded from the deemed disposal, including:
- South African immovable property;
- Certain assets attributable to a South African permanent establishment; and
- Certain retirement interests.
Once the individual has successfully ceased South African tax residence, future growth in the value of assets held outside South Africa generally falls outside the South African tax net.
Returning to South Africa
Many South Africans who previously emigrated are now considering a return to South Africa.
The key question is often:
At what point does South African tax residence recommence?
The answer is not necessarily the day of arrival.
As with ceasing tax residence, becoming tax resident again requires a factual analysis.
The Ordinarily Resident Test
The primary test of South African tax residence is whether an individual is “ordinarily resident” in South Africa.
South African courts have described an individual’s ordinary residence as the country to which they naturally return from their wanderings and which they regard as their real home.
If a former emigrant returns to South Africa permanently and intends South Africa to become their settled and permanent home once again, tax residence may recommence immediately under the ordinary residence test.
In such cases, the date of arrival may effectively coincide with the date on which South African tax residence is re-established.
However, this is not always the case.
An individual may spend significant time in South Africa while still maintaining their permanent home, family base and centre of vital interests elsewhere.
The Physical Presence Test
Even where an individual is not ordinarily resident in South Africa, they may become South African tax resident under the physical presence test.
An individual becomes tax resident if they are physically present in South Africa for:
- More than 91 days in the current tax year;
- More than 91 days in each of the preceding five tax years; and
- More than 915 days in aggregate during those preceding five tax years.
All three requirements must be satisfied.
This means that a returning South African who is careful about their travel patterns may spend substantial periods in South Africa without immediately becoming South African tax resident.
In fact, where the individual is not ordinarily resident in South Africa and carefully manages their days, South African tax residence under the physical presence test may not arise until the sixth year after their return.
This is because the test requires five preceding years of sufficient presence before residence can be triggered.
Double Tax Agreements Must Also Be Considered
The analysis does not stop with South African domestic law.
Many returning South Africans remain tax resident in another country under that country’s domestic tax rules.
Where South Africa has concluded a DTA with that country, the treaty residence provisions must be considered.
Under most DTAs, an individual who is regarded as tax resident in both countries under domestic law will be subject to a series of tie-breaker tests that examine:
- Permanent home;
- Centre of vital interests;
- Habitual abode; and
- Nationality.
As a result, it is possible for an individual to meet the South African domestic residence requirements but nevertheless be treated as exclusively resident in another treaty country for treaty purposes.
The interaction between domestic law and treaty provisions can materially affect the taxation of foreign employment income, investment income, capital gains and trust distributions.
Each case requires a detailed review of the facts and the relevant treaty provisions.
Planning Opportunities Before South African Residence Recommences
For individuals who have genuinely ceased South African tax residence and are considering a return, there may be a limited planning window before South African tax residence is re-established.
During this period it may be appropriate to review:
- Existing offshore investment structures;
- Foreign companies;
- Offshore trusts and foundations;
- Estate planning arrangements;
- Future succession planning; and
- The location of investment portfolios and business interests.
Once South African tax residence recommences, a range of anti-avoidance provisions, controlled foreign company rules, trust attribution rules and reporting obligations may become relevant.
The period before residence recommences may therefore present an opportunity to ensure that existing structures remain fit for purpose.
However, such planning should always be undertaken in light of the tax rules of the country in which the individual remains tax resident, as well as any applicable DTA.
The Risk of a Failed Emigration
One of the most important issues that returning South Africans often overlook is the possibility that SARS may conclude that they never successfully ceased South African tax residence in the first place.
Merely obtaining foreign residence permits, foreign visas or foreign tax registrations does not automatically terminate South African tax residence.
SARS may scrutinise factors such as:
- Whether the individual genuinely relocated abroad;
- The location of their spouse and minor children;
- Ownership and use of South African homes;
- The location of business interests;
- Banking arrangements;
- Travel patterns; and
- Evidence of long-term intention.
If SARS concludes that the individual remained ordinarily resident in South Africa throughout the period abroad, the consequences can be significant.
The individual may face:
- South African tax on worldwide income for prior years;
- Interest;
- Penalties; and
- Potential disputes regarding foreign tax credits.
The issue becomes particularly important where substantial offshore investment gains have accumulated during the period in question.
For this reason, individuals contemplating a return to South Africa should ensure that they can substantiate the original cessation of tax residence with appropriate contemporaneous evidence.
Conclusion
Returning to South Africa after tax emigration is not simply an immigration or lifestyle decision. It raises a series of complex tax residence questions that require careful analysis.
A returning South African may become tax resident immediately if they once again become ordinarily resident in South Africa. Alternatively, where South Africa is not yet their permanent home and the physical presence test is carefully managed, tax residence may potentially be deferred for a number of years.
The analysis becomes even more complex where the individual remains tax resident elsewhere and a DTA applies.
Perhaps most importantly, individuals should not assume that a previous tax emigration was effective simply because they left South Africa. Before making decisions regarding a return, it is prudent to revisit the original cessation of residence position and assess the potential consequences of re-establishing South African tax residence.
Given the significant tax, estate planning and structuring implications involved, obtaining specialist advice before relocating can help avoid costly surprises and identify planning opportunities that may no longer be available once South African tax residence recommences.
Get in touch if you’d like to chat more about this.
English 
French