[FAQ] The ITR12 in the year a taxpayer ceases to be a resident

[FAQ] The ITR12 in the year a taxpayer ceases to be a resident

• 11 November 2020
• Individuals Tax
• Piet Nel

Background

My client moved to the USA in August 2016 and established his personal home there from 1 August 2016. All his interests, family etc. are there. Since then he hasn't returned to South Africa. From 1 January 2017 he was considered to be a USA Tax Resident and was taxed on his RSA income as well (which was only rent from a property he is trying to sell). As far as my understanding goes, I need to indicate on his RAV001 that he is a non-resident for tax purposes, write a letter to SARS stating the fact that his tax residency status changed to a non-resident in 1 August 2016 and give a list of all his assets on 31 July 2016. He had a fixed property, a bank account, two motor vehicles, a loan to a trust (that was since written off as irrecoverable), a painting and furniture. What assets will be subject to Capital Gains Tax?

Answer

We don’t fully agree with your understanding and the comment about the RAV001.

It is our understanding that the date the individual ceased being a resident of the RSA must be disclosed in the ITR12. You will have to request a correction to the ITR12 for the year of assessment during which he ceased being a resident of the RSA. We accept that the rental income was declared, but if there was a capital gain, a voluntary disclosure may well have to be done.

The principle is that one must determine if the individual is a resident of another country for purposes of the application of any agreement entered into between the governments of the RSA and that other country for the avoidance of double taxation. This is because the RSA Act, in the definition in section 1(1) of the Act, excludes such a person. It means that a person who is solely a resident of the other country, based on the agreement, will not be a resident (for tax purposes) of the RSA and will have ceased being a resident of the RSA because of that.

When will an individual be deemed to be a resident solely of another country?

As far as natural persons are concerned the term “resident of a Contracting State” generally means “any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence or any other criterion of a similar nature.” In other treaties the reference is not to the liability to tax in the country – see below. This would then require one to determine, from the other country’s tax legislation, when someone, in this instance the person who still is ordinarily resident in the RSA, would be a resident of that other (treaty) country.

A person would be a resident alien of the United States for tax purposes if the person either meets the green card test or the substantial presence test for the calendar year (1 January 1 - 31 December).

The special rule, tie-breaker, or most common rule to determine the place of residence is based on the concept of permanent home. Relevant in this regard is the place where the individual owns or possesses a home. The wording in the treaties is very similar in this respect - the RSA United Arab Emirates one reads as follows:

“Where by reason of the provisions of paragraph 1 of this Article an individual is a resident of both Contracting States, then that individual’s status shall be determined as follows:

(a) the individual shall be deemed to be a resident only of the State in which a permanent home is available to the individual …”

Paragraph (a) of Article 4, gives preference to the Contracting State in which the individual has a permanent home available to him or her and this criterion will frequently be sufficient to solve the conflict. You will be able to determine the date now, it may well not be 1 August 2016. It is common to request the foreign revenue authority to certify that the individual is a resident of that country, in line with the double taxation agreement. The revenue authority will normally put the effective date.

Application of the principles

The Income Tax Act

For purposes of section 9H of our Income Tax Act, if the person became a “person who is deemed to be exclusively a resident of” the UK “for purposes of the application of any agreement entered into between the governments of” the RSA and the UK, the person ceased being a (tax) resident of the RSA.

You are correct (see section 9H(4)) that the following assets are excluded:

Subsections (2) and (3) do not apply in respect of an asset of a person where that asset constitutes-

(a) immovable property situated in the Republic that is held by that person;

Important to note that this is immovable property situated in the RSA. There will be a deemed disposal of immovable property situated outside the RSA (typically the permanent home there).

With respect to the loan to the trust, the proceeds is the value at the date the person ceased being a resident of the RSA.

Webinar Commentary

Further webinar commentary on Essentials of International Tax Part 4 - Basic Principles of Double Tax Agreements can be accessed here.

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