Expat taxes is possibly the most talked about topic at the moment in the tax world.
Many taxpayers are devising their own ideas of schemes to get around the expat taxes and here is what you need to know when planning your affairs around the expat taxes.
When determining whether you are subject to income tax in South Africa, SARS looks at where you are a “tax resident”. Tax residency is dependant on a number of factors which include the following:
Your ordinary residence. Ordinary residence is not defined by The Income Tax Act and is based on an individual’s facts of each case. Your ordinary residence is the vaguest of requirements and completely subjective. It is determined based on where you intend to reside and where you intend to return from your wanderings.
Many believe that by working for a company abroad and by residing in employee accommodation abroad, they are deemed to have given up their residence in South Africa and thus are not subject to taxes in South Africa.
However, if you still have a number of assets situated in South Africa, your kids go to school in South Africa and you still use South African bank accounts, then the chances are that SARS has enough evidence to prove that you have not given up your tax residency in South Africa and that you intend to return to South Africa eventually.
Therefore, you are deemed to still be subject to taxes in South Africa on your worldwide income and the new expat taxes will be applicable to you irrespective of your number of days worked outside of South Africa.
Question: Is financial emigration enough to prove I have given up my tax residency in South Africa? The answer to this is no, absolutely not. Financial emigration is a mere declaration at the reserve bank to no longer be treated as a South African resident in the eyes of the reserve bank. It does not mean that you have effectively given up your tax residency in South Africa and therefore it does not necessarily mean that you will pay an “exit charge” in the form of capital gains tax and are then no longer be subject to the new expat taxes.
Tax residency status is completely separate from one’s exchange control status. Financial emigration is therefore not the solution to all your expat taxes troubles, although it can assist in proving your intention to SARS in giving up your ordinary residence in South Africa, since ordinary residence is based purely on intention and the facts of each case.
From the above, it is clear that changing your residency status in South Africa is not as simple as merely financially emigrating.
Double Tax Agreements that are in place between two countries will also still apply and financial emigration will not render the double tax agreements null and void.
In the event that you are not ordinarily resident in a country, then SARS will look at the physical presence test discussed below.
The second manner in which SARS can prove that you remain a tax resident of South Africa is if you comply with the physical presence test. This test, unlike the ordinary residence test, is objective and defined in terms of the Income Tax Act. The test evaluates the number of days of the taxpayers physical presence in South Africa over a period of five years.
These requirements are that the person must be physically present in the Republic for a period or periods exceeding –
(i) 91 days in aggregate during the year of assessment under consideration;
(ii) 91 days in aggregate during each of the five years of assessment preceding
the year of assessment under consideration; and
(iii) 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
resident of the Republic, for tax purposes, for the year under consideration. This test is considered on a yearly basis.
In conclusion therefor if a taxpayer is deemed to be a resident in terms of the physical presence test, such a person will cease to be a tax resident if they are physically outside of South Africa for a continuous period of at least 330 full days.
Remember that if the ordinary residence test is met, SARS does not even consider physical presence thus it will not matter whether a taxpayer has been out of South Africa for 330 full days.