If you’re a South African who has been living overseas for some time, you might find yourself wondering about whether or not you should cease your tax residency now that you’ve relocated abroad. Good question. It’s especially pertinent, given that this is the first tax year in which South African expats were expected to pay income tax on their foreign employment income, where it exceeds R1.25 million. If you’re one such South African, it might seem like your only way out of paying expat tax is to terminate your South African tax residency, right? Factually this is correct, but short-sighted, as it does not take into account the other consequences of tax emigration, such as Capital Gains Tax. However, ceasing tax residency is now the only way in which South Africans can access their retirement funds before retirement age, so it becomes a game of pros and cons for South Africans facing this question, and involves weighing up all the factors before a decision can be made.
Let’s take a look at what you need to know about tax residency in South Africa, as well as the benefits and drawbacks of completing tax emigration once you’ve relocated overseas.
Question: How do I stop being a tax resident in South Africa?
Answer: fail to meet the tax resident requirements contained in the Income Tax Act.
The decision as to whether an individual ceases to be a tax resident in South Africa is based on a number of both objective and subjective factors, and includes a factual assessment into whether or not that individual evidences subjective intention to no longer be ordinarily resident in South Africa, which means they no longer call South Africa their real home.
Tax residency South Africa
The subjective factors: the ordinarily resident test
According to the South African Revenue Service, the factors that will be considered when determining whether you, as a taxpayer, has ceased to be a tax resident of South Africa include:
- The type of visa on which you have gone to the foreign country;
- Any proof of permanent residence in the foreign country;
- A certificate of tax residence from the foreign revenue authority or a letter from the authority that indicates that you are regarded as a tax resident in that country;
- Details of any property that you may still have in SA;
- Details of any business interest that you may still have in SA;
- Details of your family, including whether any family remained in SA and the reasons why;
- Details of your social interests – such as your gym contract, recreational clubs and societies and location of your personal belongings (any goods in storage, etc);
- Details of your return trips to SA, including the reason and frequency of your visits.
The objective factors: the physical presence test
An individual, who is resident by virtue of the physical presence test, will cease to be a resident when that person is physically outside the Republic for a continuous period of at least 330 full days. Once this time has passed, you will be deemed to have ceased to be a resident from the day you left South Africa.
The exception: double tax agreements
An individual who has become a tax resident of another country by means of a double tax agreement will also cease to be a resident for tax purposes in South Africa.
Question: What are the benefits of ceasing tax residency in South Africa? Answer: You will become a non-resident and exit the South African tax system.
As a non-resident, SARS will no longer be able to tax you on your foreign employment income. You will only be expected to pay tax on any income sourced in South Africa, such as rental income or for employment services rendered in South Africa.
Along with a reduced tax burden, you will be allowed to access your retirement annuity savings early, once you have ceased tax residency in South Africa and maintained this non-resident position for at least three years. Once you’ve paid tax on the lump sum withdrawal you’ll be able to transfer and use your retirement funds abroad.
Spotlight Question: Should I cease tax residency in SA if I am living overseas?
Answer: that depends on whether you intend to return to SA in the future or not.
It’s a tough call to make. Do you intend to return? Are you simply living and earning overseas with the eventual goal of returning to your home country, maybe for retirement? If the answer is emphatically negative, tax emigration might be on the cards for you.
Question: What are the tax implications of emigrating from South Africa?
Answer: You didn’t think you were going to walk away from SARS unscathed, did you?
When you cease to be a tax resident of South Africa, the tax authority is waiting to tax you one last time before you go. An exit charge becomes immediately payable to SARS, under which you are deemed to have sold all your assets (except for immovable property) at market value the day before you became a non-resident for tax purposes. Read more about Capital Gains Tax and tax emigration.
FinGlobal: tax emigration specialists
Confused as to what your next step should be? Deciding whether or not to complete tax emigration isn’t a decision you have to make alone. Our expert tax practitioners and financial planning specialists will get to know your unique circumstances and offer objective advice so that you can make an informed decision.
Ready to hear how we can help ease your tax woes? Leave us your contact details and let’s talk about your next money move.