The time for making a decision on how to deal with the fundamental tax change for South Africans earning foreign income abroad is fast running out.
The change to section 10(1)(o)(ii) of the Income Tax Act - the foreign income exemption - will become effective in about six months. South African tax residents will then be taxed on all their foreign income exceeding R1 million.
Many South Africans are still unsure what to do, how it will affect them and how the SA Revenue Service (Sars) will administer this change, says Jonty Leon, expatriate tax legal manager at Tax Consulting SA.
Sars issued a “frequently asked questions” document this week seeking to assist with clarity and consistency.
Leon says some of the confusion is caused by the fact that all South Africans living abroad are painted with the same brush and are simply labelled “expatriates”.
He says there are basically three categories: those who have emigrated permanently; those who have not emigrated but who are tax resident in another country and those who are remain tax resident in South Africa. Tax residents will be hit by the law change.
“The most effective way for the change in legislation to legally have no effect on a taxpayer is to become non-resident for tax purposes. Being non-resident would mean that the expat exemption does not apply to the taxpayer.”
He says that the burden of proving non-residency is on the taxpayer, and this burden is weighed on a balance of probabilities.
According to Sars, financial emigration is not connected to an individual's tax residence. Leon says this statement must be understood in context of Sars confirming that “financial emigration” is a factor to be taken into account by Sars when determining tax residency.
The process of financial emigration is not merely a SA Reserve Bank (Sarb) process, as it must include an important Sars component: you must obtain an Emigration Tax Clearance Certificate, issued by Sars.
Important questions answered by Sars are: “Must I notify Sars if I cease to be a tax resident in South Africa?” and “How must I notify Sars if my tax residency status changes?”
The simple answers are that Sars must be notified. This can be done on the tax return, and “Sars can be notified when an application is made for a tax clearance certificate via eFiling when emigrating from South Africa”.
Leon says a Emigration Tax Clearance Certificate is a critical part of the financial emigration process to notify Sars of your non-residency and Sarb of your emigrant status.
He says taxpayers should err on the side of caution when it comes to Sars notices and views on taxpayer status. There is a considerable difference between administrative compliance as opposed to being prepared for a Sars audit and defending your non-residency where you are audited.
When you are audited by the revenue office on your tax residency status, Sars does not have to prove anything. The taxpayer carries this burden.
“If you have not financially emigrated, we foresee an uphill battle to discharge your onus of proof that you are no longer ordinarily resident,” Leon says.