So, you left South Africa a while ago (like, ten years or so) and ended up on the other side of the world. But here’s the thing: you never officially told South Africa that you were leaving at the time. Might this cause you trouble later on? South Africa has this tax rule that says if you’re considered a “resident” for tax purposes, you need to pay tax on all your income, even if you live in Timbuktu. But if you left South Africa and aren’t living there, you’re no longer a resident, right? Not exactly. You can live outside South Africa and still be considered a resident for tax purposes. Let’s talk about how that works and what happens if you didn’t know about this and didn’t tell SARS you were leaving.
Unpacking residency for tax purposes – why does it matter?
Before 2020, South African tax residents living and working overseas didn’t have to pay South African income tax on their foreign earnings. But things have changed. Now, you only get a tax break on the first R1.25 million you make each year from your foreign job. Anything you earn over that amount gets taxed at the South African tax rate you’d pay if you were still living there.
Who/what is a South African tax resident?
Tax residency determination isn’t a straightforward matter. According to the Income Tax Act, it must be evaluated on two tests: the ordinary residence test and the physical presence test. These tests are used when an individual is not identified as a tax resident of another country by a Double Tax Agreement with South Africa.
As such, a tax resident is defined as someone who is ordinarily resident in South Africa or meets the requirements of the physical presence test. Having said that, let’s break down the South African tax residency tests.
The ordinary residence test: home is where your heart returns
Deciding whether or not you’re ordinarily resident in South Africa boils down to one major thing: if you were to return “home” at the end of your global travels, where would that “home” be? If your first thought were “South Africa,” you would be considered ordinarily resident there. If South Africa is where you naturally gravitate towards to come home and relax, it might be regarded as your ordinary residence, your usual or principal residence, or your real home. It all hinges on your intention. You must have left South Africa permanently when you emigrated, with no intent to return.
A quick tip: Even if you’re no longer ordinarily resident in South Africa but you meet all the requirements of the physical presence test, you’re still considered a resident for tax purposes.
The physical presence test: the home ground advantage
To pass the physical presence test, you must have been physically present in South Africa for:
- 91 days or more in total during the current year of assessment.
- 91 days or more in total during the five assessment years preceding the current year.
- A total of 915 days or more during the previous five assessment years.
Remember: If you fail to meet these three requirements, you cannot pass the physical presence test.
Read more: Ticking the non-resident box was not enough, expats must confirm tax status with SARS urgently.
Who/what is a non-resident for tax purposes in South Africa?
Logically speaking, you’re a non-resident if you’re not a South African tax resident. So if you don’t meet the ordinarily resident or physically present test, and there is no special tax agreement in place with another country that says you’re only taxed there, you are eligible to become a non-resident for South African tax purposes.
It is important to note that you are technically still a South African tax resident until you officially cease your tax residency with SARS. Only once you have successfully undertaken tax emigration and paid any exit tax owing will you have your tax status officially changed to non-resident.
What happens when you cease South African tax residency?
- Capital Gains Tax: You are deemed to have sold all your assets (except South African property and retirement savings) when you stopped being a resident. This can trigger capital gains tax to SARS, also known as exit tax.
- Retirement Annuity withdrawal: You become eligible to cash in the full value of your retirement savings before age 55 once you have maintained non-resident status for three consecutive years.
How to tell SARS you’re exiting the South African tax system
You can notify SARS about your change in tax residency online using the RAV01 form. SARS will then investigate your claim to be a non-resident. To prove you’re no longer a South African tax resident, submit a Declaration of Cease to be a Tax Resident form and provide documents showing you’ve moved away permanently. Once SARS agrees, they’ll give you a Non-Resident Confirmation Letter. This letter proves you’re no longer a South African tax resident, so you won’t have to pay taxes on your worldwide income.
Read more: Emigration and changing your tax resident status after leaving South Africa.
Residency status for tax purposes – ensure your past mistakes don’t catch up with you.
If you didn’t declare capital gains when you stopped being a resident, you can come clean through the Voluntary Disclosure Program. This might help you avoid penalties and legal trouble.
Read more: SARS Voluntary Disclosure: window for non-compliant South African taxpayers to come clean.
FinGlobal: tax emigration specialists
Need help with clarifying your tax resident status in South Africa? That’s where FinGlobal steps in. We’re experts in helping South Africans transition their finances and sort out their taxes. We’ve helped thousands of expats in more than 105 countries streamline various aspects of their cross-border portfolios, including tax clearance, retirement annuity withdrawal and international money transfer from South Africa.
Want to know more? Just leave your contact details below, and we’ll be in touch to chat about your situation.