The facts on expatriate tax and tax emigration in practice

---

The facts on expatriate tax and tax emigration in practice

• 21 April 2023
• Individuals Tax
• FinGlobal

The facts on expatriate tax and tax emigration in practice

Leaving South Africa and moving overseas permanently is more complicated than most people think. It’s not just a logistical challenge, it’s also challenging from a tax and financial planning perspective. This is because many people operate under the misconception that physically relocating from South Africa is sufficient to terminate their tax obligation to the South African Revenue Service (SARS). This is not the case. Let’s take a look at what expats need to know about tax and how it applies to them and their emigration, from a practical perspective. 

What is the difference between South African expats and tax non-residents?

Practically speaking, South African tax non-residents are individuals who have broken tax ties with the South African Revenue Service. They no longer meet the requirements for tax residency, and they have undertaken the necessary formal procedures to have their status changed from tax resident to tax non-resident. They are no longer liable to pay tax on their worldwide income, and they will only be taxed on income that is sourced in South Africa. 

A South African expat is also known as a tax resident temporarily abroad, and is subject to the same tax obligations as a regular tax resident. This includes the expectation that they will declare their foreign employment income and pay the necessary tax thereon, known as ‘expat tax’.  As such, an expat is a tax resident temporarily abroad who is an individual who has not yet terminated tax ties with South Africa and who still meets the requirements of tax residency. 

What is Expat Tax?

An expat is an individual who is living and working outside of their country of citizenship/residence, usually temporarily. Such individuals are now taxed in South Africa on their worldwide income, which includes their foreign employment income. Previously, employment income earned abroad was entirely exempt from tax in South Africa if the necessary requirements were met. 

Some factors to note about expat tax as it applies to foreign employment income: 

• Employment is exercised in the place where the employee is physically present when performing their duties or activities for which the employment income is paid.

• For tax relief, expats can utilise Section 10(1)(o)(ii) of the Income Tax Act if they meet the requirements. In terms of this relief, they can request that the first R1.25 million of their income earned abroad be exempted from tax, which is applied in the form of a rebate or deduction, depending on the situation.

What is a Tax Non-Resident?

Before we can determine tax non-residency, it is necessary to clarify the definition of tax resident. According to the provisions of Section 1(1) of the Income Tax Act the term “resident” refers to any natural person who is, during the relevant year of assessment: 

• Ordinarily resident in the Republic; or 

• Physically present in the Republic 

These are the two pillars upon which tax residence is assessed and determined. The Income Tax Act clarifies further that a “resident” does not include any person who is deemed to be exclusively a resident of another country for the purposes of the application of a Double Tax Agreement. 

As such, a non-resident can be defined as: any person who is deemed exclusively a resident of another country.

In practical terms, if a natural person emigrates from South Africa to another country, that person should cease to be a resident of South Africa from the date that person emigrates and becomes a non-resident. However, this is not an automatic process. There is a general misconception that once you emigrate, you automatically terminate ties with SARS, and your tax obligation is ended. This is not the case.

What does SARS expect from expats in terms of their foreign employment earnings? 

All worldwide income must be declared in the individual’s tax return and if relief in terms of the foreign employment income exemption is sought, the individual must prove that they meet the requirements to utilise such relief.

What is the SARS qualification test for the foreign employment income exemption?

1. Is the individual a tax resident as defined in the Income Tax Act?

2. Is the remuneration eligible for the exemption? (i.e: it is not excluded by definition because it was earned while holding a public office/civil servant position)

3. Was the individual employed to render services outside South Africa?

4. Was the individual party to an employment relationship in which the income was earned? (This excludes independent contractors, self-employed and freelancers)

Then it is necessary to establish:

• Was the individual employed and did they spend more than 183 full days outside South Africa during any 12 months within the required period?

• Was the individual employed and did they spend more than 60 consecutive full days outside South Africa during any 12 months within the required period?

Any taxes paid on foreign income earned may qualify for the section 6quat rebate. 

The foreign tax rebate - Section 6 quat:

South Africa offers relief from being taxed twice on foreign-sourced income for its residents. This relief is given through a rebate or deduction on the foreign taxes paid. Section 6quat (1) is the primary method used to provide this relief. 

• Rebate method = Section 6quat (1) * if the foreign taxes were proved to be payable.

• Deduction method = Section 6quat (1C) (a) * if the foreign taxes were paid but not proved to be payable.

Ceasing South African tax residency: the facts

Before we get into the SARS requirements and different methods or qualification basis in which you can cease to be a resident in South Africa, it is necessary to note a few contextual points: 

• South Africa moved to a residence-based tax system on 1 March 2001. This is not news, but the focus on resident and non-resident intensified with the replacement of the ‘old’ Financial Emigration process through the South African Reserve Bank with the ‘new’ process of Tax Emigration through SARS effective 1 March 2021.

• The exact details of the tax emigration procedure were unclear from the outset, which caused much uncertainty. SARS acknowledges this ‘gap’ in process and states that individuals who have previously ceased residency must request confirmation thereof by contacting SARS and submit a letter which contains:

1.  Background to the request;

2. Basis on which the individual ceased tax residency; and 

3. Date and manner in which SARS was informed.

How was SARS informed?

• In 2021: it was enough to tick the relevant box confirming non-resident status when submitting a tax return. 

• In 2022: the Registration, Amendments and Verification (RAV01) Form submission was required before submitting a tax return. 

Where individuals have experienced challenges with the RAV01 option, especially for taxpayers with a cessation date prior to March 2001, the Notice of Non-Resident confirmation letter will need to be issued manually. 

In practice, an individual is regarded to have two assessments for the tax year in which they cease to be a resident:

1. For the portion of time they were a SA tax resident.

2. For the time they were a non-resident.

We have recently noticed that if SARS recognises an individual’s change in residency status and determines an effective date, they may revise the assessment for the tax year in which the individual ceased to be a resident. This may result in a change in the rebate that was previously awarded being apportioned accordingly. 

When to inform SARS of a change in tax residency status?

SARS needs to be informed of such change within 21 days, but this conflicts with the requirement that most other countries will only consider an individual a tax resident after spending 183 days in that country. 

What does SARS require to cease tax residency? 

SARS has two main requirements to cease South African tax residency.

1. The Standard Requirements 

2. The Specific Requirements

The standard requirements must accompany all cessation of residency applications to SARS: 

1. A letter of motivation setting out the facts and circumstances in detail to support the disclosure

2. Signed declaration indicating the basis on which the individual qualifies

3. A copy of their passport and travel diary

The specific requirements depend on the three qualification bases on which to cease residency:

1. Cease to be ordinarily resident: SARS has a specific list of additional documentation, including visa type, proof of permanent residence, details on property in SA, business interest, information relating to family ties in SA to name a few.

2. Cease to be physically present: SARS will specify if they need anything over and above the standard requirements, as this is a time-based test. 

3. Due to the application of the Double Tax Agreement [DTA]: Certificate of tax residence from the foreign revenue authority or a letter from the authority is required

Once an application is submitted to SARS, an automated letter will notify the applicant of all of the above-mentioned documentation required to support the case being made. It is up to you as the applicant to determine which documents to provide to SARS and which documents are irrelevant based on the three qualification bases to cease.

The consequences of ceasing South African tax residency including the benefits of becoming a tax non-resident

Once SARS has been informed that an individual has ceased to be a tax resident and they have completed the process of tax emigration by paying the deemed capital gain tax (if applicable)  that person is now a non-resident for tax purposes.

Consequences:

1. Exit tax charge: Upon ceasing to be a resident, an individual must inform SARS within 21 days and declare their deemed disposal of worldwide assets to SARS in terms of Section 9H. 

• This disposal is calculated the day before the individual ceases residency, and taken at market value on that day. 

2. Reduced obligation to file a tax return in SA: only where the individual still earns an income or holds income-bearing assets in South Africa. 

Benefits:

1. Protect offshore assets from SARS:  if an individual first ceases residency with SARS and then accumulates offshore assets, there is no obligation to SARS to pay an exit charge. 

2. Moving to a lower or tax-free jurisdiction: Many individuals emigrate for this reason.

3. Simplified tax obligation: Only have to declare SA sourced income to SARS unlike having to declare worldwide income to SARS (as with expat individuals).

Deemed disposal capital gains tax on cessation (assets included and excluded)

What are the different types of assets that are included and excluded for deemed disposal CGT/exit charge?

Included	Excluded
Foreign immovable property Worldwide unit trusts Worldwide investment plans Worldwide listed shares and unlisted shares Foreign timeshare Worldwide Krugerrands and gold coins Cryptocurrencies	SA fixed property (actual sale will be declared to SARS) Cash balances South African timeshare Some employee scheme shares that have not yet vested. Some Employee scheme options that have been granted within 5 years of residency cease date.

It should be noted that once an individual ceases residency, the base cost and market value used to determine the deemed disposal CGT is calculated one day before the cessation date. For example, where an individual ceases to be a resident on 7 January 2022, they are deemed to have disposed of their assets on 6 January 2022. Furthermore, if an individual buys an asset after the cessation date when he/she is already considered a non-resident and had none of the above-mentioned assets on the cessation date, there will be no deemed disposal or exit tax.

0 COMMENTS

LEAVE A COMMENT