Why is it important to know what your tax residency is?
In terms of South African income tax legislation, South African tax residents and non-South African tax residents are taxed differently, as is the case in almost every country around the world. A South African tax resident is taxed in South Africa, by SARS, on its worldwide income, irrespective of where the income originates from or the source of the income.
A non-South African tax resident on the other hand, is only taxed in South Africa on the income that they earn from a South African source. For example, Barry is a French tax resident. He invested money into a South African bank account and earns interest on his investment in the South African bank account. Although Barry does not live in South Africa and he is not a South African tax resident, he will be required to declare this income on an income tax return to SARS and pay tax thereon. He will however be allowed the annual interest exemption, which is R23 800 for an individual below 65 years old and R34 500 for individuals above 65 years old. Whatever income Barry earns from a non-South African source though, will not be taxed in South Africa and Barry need not declare it in South Africa.
A South African tax resident on the other hand, will be required to declare interest income on his/her income tax return whether it is earned from a South African bank account, a French bank account, or wherever in the world the bank account is. This is a result of the income tax legislation in South Africa that allows for SARS to tax South African residents on their worldwide income.
The same rule applies to immovable property, where a property is situated within South Africa, it has a South African source and thus if that immovable property is disposed of, there will be tax payable to SARS, whether the seller is a South African resident or a non-South African resident. If the seller of the immovable property is a non-South African resident, there will be an amount of tax withheld form the selling price, known as a withholding tax, which is considered to be a pre-payment of the capital gains tax that will eventually be due and payable by the non-resident taxpayer.
It is important to note that taxpayers operating in two or more jurisdictions are governed by double tax agreements between countries. A double tax agreement is where the two countries have agreed on who will have the taxing rights over a certain source of income earned by a taxpayer. It is therefore always important to consider first a double tax agreement, if there is a taxpayer who falls within more than one tax jurisdiction. If there is in fact no double tax agreement, both jurisdictions tax legislation may apply to the income earned by the taxpayer.
Take note that tax residency is a complicated matter and is determined from your ordinary residence and your physical presence in South Africa. It is therefore advisable to not make any assumptions when considering your tax residency status but instead consult with an experienced tax advisor.
Willem Oberholzer is executive director and Jade Els MCom Tax is a tax adviser at Probity Advisory.