On 1 March 2020, an amendment to the Income Tax Act was promulgated, bringing so-called “expat tax” into play. The amendment has raised numerous questions about what it means to be a South African tax resident, and whether or not it is viable to financially emigrate for exchange control purposes.
Tax residency and exchange control residency are completely different concepts, and each is the jurisdiction of separate institutions. The South African Revenue Service (SARS) deals with tax residency, whereas emigration for exchange control purposes is a process conducted via the South African Reserve Bank (SARB).
So, how do they relate to each other – if indeed at all?
Firstly, what is expat tax?
Before March 2020, the Income Tax Act offered tax relief for a South African tax resident, provided that the resident’s letter of employment required him or her to work outside South Africa for more than 183 days in a rolling 12-month period, of which at least 60 days were continuous. The exemption was intended to protect individuals from being double taxed, but in reality, some individuals were using the clause to avoid paying tax in any country. The United Arab Emirates, for example, has no direct tax requirements and South Africans working in Dubai could theoretically avoid paying tax anywhere yet still retain their South African residency.
This loophole has since been closed. The same “absence day rules” apply in the new exemption clause, but as of 1 March 2020, only the first R1,25 million earned outside South Africa is exempt from South African income tax; the remainder is subject to tax in South Africa. A provision has been made to prevent double taxation on the same renumeration: if tax is paid in a foreign country, tax credits may be claimed on the South African tax return.
Note that the tax relief provision only applies to people who receive “remuneration” as defined in the Act. (All payments, fringe benefits and allowances payable or granted from an employer, whether local or foreign, to an employee.) It therefore doesn’t apply to anyone who is self-employed – an independent contractor who works overseas, for example – or to other taxable income such as capital gains tax, foreign dividends, foreign interest and the like.
There was plenty of confusion when the National Treasury alerted the public to the impending amendment, and tax advisors and estate planners scrambled to find solutions for their expat clients. Most suggested one of two options: ceasing South African tax residency or emigrating for exchange control purposes. Both are relatively complex solutions, however, and it’s worth unpacking what each term means.
Tax residency
In order to cease being a tax resident, you must first ascertain how you became a tax resident in South Africa in the first place. Currently, there are two ways of becoming a tax resident as a natural person: if you are ordinarily resident in South Africa; or if you meet the requirements of the physical presence test – in other words, if you spend a certain period of time per year in South Africa.
Countries use different rules or tests to determine when a person is considered a tax resident. As a result, you may qualify as a tax resident in more than one country and be subject to tax in two jurisdictions. In this case, there needs to be a Double Taxation Agreement (DTA) between South Africa and the other country concerned, which specifies to which jurisdiction tax needs to be paid. South Africa has DTAs with many countries, but the individual conditions can differ. Likewise, each individual tax-paying case is unique and requires careful planning and negotiation.
However, a DTA only applies if you are a South African tax resident according to the physical presence test. It does not apply if you are ordinarily resident in South Africa. This is where it gets a little murky. Being ordinarily resident for tax purposes boils down to intention – you will still pay tax in South Africa even if you leave the country for long periods of time, as long as you intend to return one day. Therefore, the only way to cease South African tax residency if you are ordinarily resident is to state that you want to become ordinarily resident in another country.
On the day that you cease to be a tax resident in South Africa, there will be a disposal of your worldwide assets resulting in capital gains tax payable to SARS. It is important that the CGT is calculated and disclosed in a timeous manner to fulfil the necessary compliance requirements, and again, there are certain exemptions for the purpose of this calculation.
Ultimately, it takes thorough planning if you wish to cease your South African tax residency. A qualified tax advisor can ensure that no double taxation takes place, and that you do not become guilty of non-disclosure in one or both of the jurisdictions concerned.
Exchange control residency
Emigration for exchange control (excon) purposes has no direct bearing on your tax residency, but the two can go hand-in-hand. An emigrant can still be a South African tax resident according to the physical presence test. Simultaneously, emigration for excon purposes can also be one of the factors that supports your claim for ceasing to be ordinarily resident in South Africa for tax purposes.
In order to emigrate for excon purposes, formal application must be made to the South African Reserve Bank (SARB), which imposes strict rules on the movement of assets and funds across South Africa’s borders. Tito Mboweni’s 2020 budget speech hinted that some of these rules might be amended, but in our opinion there will still be some form of initial reporting of assets required by individuals upon exiting South Africa.
Emigration for excon purposes may be a viable option for a small minority of individuals, but for most people it’s likely to be a costly exercise that won’t provide significant tax relief. Failure to properly plan your exchange control emigration, especially where local trusts are involved, can have severe and long-term ramifications. As with changing your tax status, it is highly recommended to seek professional advice in this regard.
If you work overseas, or if you are considering leaving South Africa permanently and you are not sure which regulations apply to you or how best to structure your finances, it’s always best to consult a professional cross-border specialist who will take all the small details into account and make sure your estate is as tax-efficient as possible.
If you’d like to discuss the content of article, please contact Shaun Eastman, email shaune@sentineltrust.co.za
Shaun Eastman, BCom (Law), LLB, LLM (Tax Law)
Admitted Attorney
Trust Executive / Cross-Border Tax Specialist