Your SARS Residency Status Impacts Your Taxes and International Money Transfers

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Your SARS Residency Status Impacts Your Taxes and International Money Transfers

• 22 February 2024
• Accounting
• Mathys Briers-Louw

1. Introduction

South Africa's globalized economy prompts many individuals to seek avenues for transferring funds overseas. Whether you are a South African tax resident looking to diversify your investments or a tax non-resident engaging in cross-border transactions, understanding the process and limitations is vital.

Exchange Control (Excon) compliance is overseen by the South African Reserve Bank’s (SARB) Financial Surveillance Department (FinSurv) and facilitated through Authorised Dealers (banks) and Intermediaries such as Currency Assist, specialising in International Money Transfers (IMT) and Excon applications and compliance.

IMT from South Africa (SA) has become less complicated compared to the restrictive Excon regulation of the past, however, the requirement to retain a proper paper trail appears to be more complex. Over the years the focus shifted towards ensuring tax compliance and verifying the source of funds which is a global phenomenon not to be blamed on SA’s Excon Regulations. The Excon rules governing resident and non-resident taxpayers remain distinct. In the first instance, it is necessary to determine a client’s tax resident status when doing IMT.

The South African Revenue Services (SARS), the SARB and Home Affairs all have different definitions for residents and non-residents and none of those align although, place of birth, where you are registered to pay taxes and where you reside plays an important role. Everyone’s circumstances should be considered on its own merits. Even clients with no recent links to SA and not in possession of an SA passport or ID will often be treated as residents, temporarily abroad, merely because the foreign passport identifies the place of birth to be SA.

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2. Tax Resident

An individual is considered an SA tax resident either through ordinary residence or physical presence. It is the one or the other, never both or a combination – the two tests are mutually exclusive and persons ordinarily resident are never subject to the physical presence/absence test.

Since 1 March 2001, SA transitioned from a source-based to a residence-based tax system. Under this framework, tax residents are liable for taxation on their worldwide income (including Capital Gains Tax (CGT) on the disposal of worldwide assets albeit as of 1 October 2001), subject to specific and often unilateral exemptions or exclusions.

People born in SA have South African ID numbers and are for exchange control purposes seen as residents, even if they left SA years ago without notifying the SARB or the SARS thereof. They remain residents for tax and exchange control purposes even after renouncing SA citizenship. The cessation of residence and the previous SARB status update are now SARS-driven and Home Affairs status may be a significant indicator, but never the ultimate reason for residency status changes.

Excon imposes restrictions on both the monetary values and the frequency of transferring funds abroad. To claim you are not an SA resident for tax and exchange control purposes you would need to provide proof thereof such as the old and now phased-out financial emigration (explained below) outcome (MP336(b) letter) issued by the SARB or lately, confirmation of ceasing tax residency or tax emigration (explained below), a letter issued by SARS that an individual is a non-resident for tax purposes.

2.1. Ordinarly Resident

The concept of “ordinarily residence” is not clearly defined and the determination of whether or not an individual is an ordinarily resident for tax purposes must be done on a case-by-case basis. A number of factors must be taken into account to make such a determination.

2.2. Physical Presence

An individual can become a tax resident in the SA through physical presence, determined by the “days test”. This test evaluates an individual's tax residency based on the total number of days they spend physically present in the country. The assessment is quantitative, focusing solely on the duration of physical presence and disregarding the purpose or nature of the visit. Regardless of the reasons for an individual's presence in SA, the primary factor in determining tax residency under the physical presence test is the actual number of days spent within the country.

For an individual to be considered a tax resident of SA, they must meet specific requirements related to physical presence, including:

• Being physically present in SA for a period or periods exceeding 91 days in aggregate during the year of assessment under consideration;
• Accumulating 91 days in aggregate during each of the five years of assessment preceding the year under consideration; and
• Spending a total of 915 days in aggregate during the five preceding years of assessment.

A natural person who complies with all the requirements referred to above is a SA tax resident, for the year under consideration.

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3. Non-Resident

Non-residents are subject to taxation on income derived from a South African source, with their exposure to Capital Gains Tax (CGT) limited to capital gains on immovable property within SA. In some cases, non-resident taxpayers may also be liable for CGT on shares in local companies, specifically those classified as property-rich companies, as well as Estate Duty (similar to inheritance tax in other jurisdictions) on SA assets. It is important to note that even if a person attains tax non-residency status due to a tax treaty, they remain subject to Estate Duty on their global assets, not just those in SA.

Tax residency plays a pivotal role in the context of Excon and its application. The determination of an individual's cessation of tax residency in SA is based on their prior tax residency status. If the individual was ordinarily tax resident, the assessment involves a factual inquiry into whether their subjective intention to no longer consider SA their primary home is substantiated by various objective factors. Once the individual successfully ceases to be an ordinary tax resident, this change in residency status is considered effective from the day they terminated their residence.

It is also crucial to understand the basis on which a person claims tax non-residency in SA, as the Income Tax Act does not provide a definition for "non-resident" or "ordinarily resident." The letter issued by the SARS for tax non-residency confirms the cessation of tax residency without specifying the reason for ceasing such tax residency.

To be ordinarily non-resident for income tax and Estate Duty purposes, an individual must have the intention and ability not to return to SA at the end of all journeys. The determination of whether an individual ceases to be an SA tax resident is contingent on the individual's previous tax residency status in the country. For individuals who are tax residents by virtue of the physical presence test, the cessation occurs when they remain physically outside South Africa for a continuous period of at least 330 full days. Additionally, individuals acquiring tax residency in another country through a double tax agreement will cease to be residents for income tax purposes in South Africa.

3.1. Formal/Financial Emigration

Formal emigration or financial emigration, once a SARB process allowing SA citizens and Excon residents to change their residence status from 'resident' to 'non-resident,' underwent a significant transformation. Initially, SARS approval of good standing was sufficient, until confusion arose when SARS intertwined Excon status with tax law. SARS began issuing tax emigration clearances, often misinterpreted as confirmation of tax emigration or the cessation of tax resident status. Despite the Formal Emigration process lacking mention in the Income Tax Act and calling for a 5-year no-return to SA undertaking, no such stipulations existed in double tax treaties, tax laws, or SARS interpretation notes.

Formal Emigration, crucial for Excon and early encashment of retirement annuities, was phased out by SARB, coinciding with changes in the SA Income Tax Act effective from 01 March 2021. Importantly, SARB approval for formal emigration, when applicable, did not inherently impact an individual's tax resident status or terminate their ordinarily resident status. It was just one factor considered when evaluating SA tax residence termination. The act of formal emigration did not automatically break one's ordinarily tax resident status, and those who formally or financially emigrated were not exempt from SA Estate Duty unless they updated their tax status with the necessary SARS declaration.

During the formal emigration era, many South Africans obtained Excon non-resident status without SARS tax emigration clearance. The recommended approach is to reconfirm tax non-residency status through the current process, involving a new SARS declaration specifying the reason for tax non-resident status, either treaty-based or no longer ordinarily resident.

3.2. Tax Emigration

The process of tax emigration, involving the cessation of resident status for tax purposes, is essential not only for those aiming to become non-residents but also for Estate Duty purposes and accessing remaining SA assets and cash. Failing to complete this process may lead to continued adherence to SA tax laws on worldwide income, potentially resulting in SARB restricting access to SA assets, including inheritances and SA trust distributions.

Repatriating funds or transferring an SA inheritance abroad can be challenging for individuals without proper documentation. Taxforum Wegkaner's Hugo van Zyl, CA(SA) TEP MTP(SA), highlights that clients have faced challenges from the SARS due to cross-border cash flow information and foreign cash transfers outside SA, reported to SARS through the Common Reporting Standards (CRS) and the USA Foreign Account Tax Compliance Act (FATCA).

Full disclosure, including claiming treaty and unilateral exemptions, is recommended to avoid potential issues. The CRS, a global initiative, enhances the automatic exchange of financial information among countries, aiming to standardize reporting, identify tax evasion, and promote transparency.

For past formal emigrants, obtaining current SARS confirmation of non-resident tax status is recommended to prevent global wealth and fund flows from being reported to SARS. The failure to do so may lead to uncomfortable inquiries from SARS, especially with the implementation of CRS and FATCA.

The assessment of tax residency status depends on various factors, including the individual's subjective intention to no longer be ordinarily resident in SA. The cessation of tax residency date may vary based on whether the individual was ordinarily tax resident, resident by virtue of the physical presence test, or became a tax resident of another country through a double tax agreement.

When a taxpayer terminates their tax residency in South Africa, they must notify SARS using the Registration, Amendments, and Verification Form (RAV01) on eFiling. This involves capturing the date on which the taxpayer ceased to be a tax resident under the Income Tax Liability Details section of the form.

Upon the cessation of tax residency, a deemed disposal for CGT purposes occurs, meaning the individual is considered to have disposed of their worldwide assets, excluding immovable property situated in SA.

Once an individual is no longer a tax resident in SA, they are only taxed on income sourced within SA and not on their worldwide income. Subsequently, a case is generated, and SARS sends a letter to the taxpayer, requesting the submission of supporting documents.

The purpose of this declaration is to notify SARS about the change in tax residency, impacting the basis on which the taxpayer will be subject to tax in SA. The assessment of returns going forward will be influenced by this change. Additionally, depending on the assets held and their locations at the time of cessation, there might be a deemed CGT disposal in the year the individual ceased to be a tax resident.

3.3. Estate Duty

Estate Duty is levied on the worldwide property and deemed property of a natural person who is ordinarily resident in SA and on SA property of non-residents.

It is important to note that people tax emigrating on a tax treaty may be a non-resident for tax purposes but remain ordinarily resident for Estate Duty purposes.

3.4.  Distribution from SA Trusts

The conduit principle for non-residents has been effectively disabled. According to section 25B of the Income Tax Act, income distributions from SA trusts to non-resident taxpayers starting from 01 March 2024, will be subject to taxation within the trust at a fixed rate of 45% before the distribution can be made to a non-resident beneficiary. This amendment aligns section 25B with Paragraph 80 of the Eighth Schedule, where capital gains related to non-resident beneficiaries have been taxed at 36% CGT within the trust for an extended period.

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4. International Money Transfers (IMT)

International Money Transfers (IMT), necessitate execution through Authorised Dealers (banks) or with the support of Intermediaries such as Currency Assist. Currency Assist aids residents and non-residents in navigating legal and regulatory complexities associated with transferring funds to and from SA, leveraging better exchange rates due to higher transaction volumes.

Not all IMTs require AIT approval from SARS. Certain IMTs for tax non-residents can occur without the need for the R10 million AIT approval. Taxforum’s Van Zyl advises tax non-residents to consult with Currency Assist before instructing their tax practitioners to obtain AIT approval for post-emigration income, pensions, living annuity benefits, and SA trust distributions.

Residents can transfer funds abroad as part of their annual allowances:

Annual Single Discretionary Allowance (SDA) – R1 million:

SA residents (including those temporarily abroad) over 18 years old can transfer up to R1 million abroad per calendar year without approvals, facilitating personal financial transactions and investments.

• Minors under 18 have a travel allowance of R200,000 per individual per calendar year.
• Non-residents, in the year of ceasing tax residence, may avail limited travel allowance benefits.

 

Both residents and non-residents:

Annual Foreign Investment/Capital Allowance (FIA/FCA) – R10 million:

The foreign investment allowance allows SA residents and emigrants with remaining assets to transfer up to R10 million abroad per calendar year for foreign investment purposes. A SARS application for Tax Compliance Status (TCS) Personal Identification Number (PIN) is required for an AIT letter. The R10 million limit may be increased following a more complex SARB and SARS process.

 

For non-residents:

Remaining R100,000 cash: Non-residents, having ceased tax residency, can remit the remaining cash balance, up to R100,000, abroad on a once-off basis without SARS approval. This facilitates closing bank accounts and deactivating tax numbers.

To transfer more than R10 million per calendar year abroad, both residents and non-residents need SARS approval for AIT and subsequently, an application to the SARB.

Repatriating Money from South Africa as a Non-Resident

Ceasing SA tax residency alters the eligibility for certain allowances, such as the annual Single Discretionary Allowance (SDA), except in the year of ceasing tax residency where up to R1 million travel allowance can be transferred without a Tax Compliance Status (TCS) Personal Identification Number (PIN).

1. Income

Funds derived from income sources, including rental income, dividends, and pension income, do not require explicit permission from the SARS for transfer abroad. However, providing the Authorised Dealer with an annual Good Standing Tax Compliance Status (TCS) PIN letter from SARS through the eFiling platform is necessary.

2. Capital

Funds from a capital source, such as proceeds from property sales, retirement annuities, or investments, attract significant attention from SARS. To transfer funds from a capital source, obtaining a TCS PIN for an Approved International Transfer (AIT) (up to R10 million per calendar year) is required. Non-residents aiming for international transfers must meet specific requirements, including providing proof of the fund's source and evidence of ceasing tax residency in SA (if applicable).

For SA non-tax residents wanting to transfer more than R10 million offshore, a stringent verification process by SARS and subsequent approval from the SARB FinSurv is required. Such transfers trigger a risk management test, including verifying tax status, fund sources, and risk assessment for anti-money laundering and countering terror financing requirements.

When doing international money transfers choose a forex service provider that understands the tax, legal and exchange control implications.

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For assistance with:

• International Money Transfers and Exchange Control – mathys@currencyassist.com
• Tax emigrations – tax@taxforum.co.za
• Legal – mathys@sllaw.co.za

SOURCE:

Written by Mathys Briers-Louw, BComm (Law) & LLB (Stellenbosch), LLM in Transnational Business Practice (Pacific, McGeorge, USA), International Money Transfer Specialist at Currency Assist, Attorney at SL Law Incorporated and Legal Adviser at Taxforum cc South Africa, Twenty2Services and SitusFiduciary.

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