South African expatriates who ignore their tax obligations will soon find themselves facing the wrath of the taxman in the upcoming tax season.
SARS has urged taxpayers including expats (South Africans residing outside the country) to urgently review their tax compliance status or stand the risk of facing major penalties or even jail time.
Originally, individuals where taxed according to a source-based tax system but from 1 March 2001 it has changed so that individuals will be taxed according to a residence-based tax system. In easier terms, since March 2001 tax residents will be taxed on all their worldwide income (local and foreign), while non-residents will be taxed on their South African sourced income only.
What does tax resident mean?
If you are seen as a tax resident, this means that you will be taxed on all your income (local and foreign).
While you may be living in another country, if you spend a significant amount of time in South Africa or have assets and family based in the country, you could still be considered a South African tax resident.
You will need to confirm if you are seen as a tax resident to ensure that you are not under-declaring your income and to avoid unnecessary penalties and interest on top of your tax due to SARS.
There are two steps that you can following to check if you classify as a tax resident or not:
Step 1: The Ordinarily Resident Test
You will be seen as an ordinarily resident if your ordinary residence is in South Africa where you return to after travelling. You can still be regarded as being a tax resident in South Africa regardless of the amount of time you have spent outside the country.
Some of the factors SARS will consider to decide on your residency status include:
Step 2: The Physical presence test
If you are not seen as a resident by the ordinarily resident test, you may still be seen as a resident by the physical presence test. This test is based on the amount of time you physically spend in the country.
You will be regarded as a South African tax resident if you meet all of the criteria below:
You need to meet all three of the above requirements to satisfy the physical presence test. It is important to note that the tax residency by the physical presence can be broken by leaving South Africa for a stretch of 330 full days.
If you are unsure, please check out TaxTim’s handy decision tree to see if you qualify as a tax resident.
The effect of a Double Taxation Agreement (DTA)
A DTA is an agreement between two countries which is set up to avoid the same income being taxed twice i.e. South Africa and the foreign country. It also provides requirements that must be fulfilled to be able to confirm in which country you qualify as a tax resident when you are in the situation that you are seen as a dual resident.
This means if you are deemed as a South African tax resident by means of the ordinarily residency test or by the physical presence, you may not be regarded as a South African tax resident if it is determined that you are resident of another country when applying a DTA.
For example: If you have been working in America for the past ten years, you may realise that you are a dual resident because you are a tax resident in both the US and in South Africa. This is where the DTA comes in handy to check the requirements of the DTA that must be met to confirm in which country you are tax resident to avoid double taxation.
The beginning and the end of your residency
It is important to take note that the start dates and end dates are a bit different from being an ‘ordinarily resident’ or being a resident in terms of the physical presence test.
Resident by Physical Presence Test
It will be the specific date you became an ordinarily resident. You will be seen as a non-resident up to this specific date.
You will be seen as a resident from the first day of the relevant tax year in which you met all the requirements of the physical presence test.
It will be the specific date you are no longer seen as ordinarily resident. For example, if you decided to emigrate you will cease to be a non-resident from the date you left the country.
You will not be seen as a resident from the last day you have been in South Africa if you were physically outside of South Africa for a continuous period of 330 full days from this date.
It is important to note, that if you are an ordinarily resident in South Africa but were physically absent for a continuous period longer than 330 days, you will still be seen as an ordinarily resident of South Africa.
How do I inform SARS that I have ceased to be a resident?
You have two ways to inform SARS that you have ceased to be a resident:
You will need to let SARS know that you ceased to be tax resident so their system is updated so that you are taxed as a non-resident and no longer as a resident.
What must I keep in mind when I cease to be a tax resident?
When you break your tax residence, it will be deemed that you have disposed of all your worldwide assets, excluding immovable property situated in South Africa for capital gains tax purposes.
Once you ceased to be a South African tax resident, you will need to take note of the following:
What documents do I need to submit to SARS?
When you declared on your return that you have ceased to be a tax resident, SARS will request supporting documents from you to prove that you are no longer a South African tax resident. The supporting documents SARS requires depends on the basis on which you have ceased to be a tax resident.
Be warned – SARS may not make this easy for you! If you don’t submit sufficient proof, SARS will decline your declaration and you will be taxed as a South African tax resident.
You will need to submit the following standard documents with the declaration:
In addition to the standard documents, if you indicated in your declaration that you ceased to be ‘ordinarily resident’, you will also need to submit the following:
If you indicated in your declaration that you ceased to be a resident by way of the physical presence test, there is no additional documents to the above standard list of documents.
In addition to the standard documents, if you indicated in your declaration that you ceased residency due to a DTA, you will need to submit:
Is there a chance that SARS will decline my declaration?
Yes, SARS can decline the declaration if one of the following conditions apply:
I declared that I ceased to be a tax resident a while ago - how do I confirm this?
If you want to confirm that your tax residency status is correct or proof thereof, you can submit a request by send a letter to SARS.
The letter should contain the following: