By William Louw
Living abroad has a significant impact on how much tax you pay and to which country that tax is to be paid. Your tax residency status determines how you are taxed in a particular country.
South Africans who have left the country must now obtain a letter from SARS to confirm their tax non-residency status. SARS non-residency tax status confirmation letters will be issued to individuals who are permanently leaving the country. This letter confirms that an individual has ceased to be a tax resident of South Africa with an outline of the date tax residency was ceased.
To be able to apply for the SARS Non-Resident Tax Status Confirmation Letter an individual must have already completed the tax emigration process through SARS.
Understanding tax residency
Whether you reside in South Africa or abroad, you will be subject to income tax. There are two concerns: where do you pay taxes and how do you avoid paying more than one tax on the same income.
If an individual resides in South Africa, they are most likely regarded as a resident of the country for tax purposes (there are a few exceptions and only in very specific circumstances). South African tax residents must pay SARS taxes on their income earned in South Africa along with foreign income, in instances where that income exceeds a certain amount.
Leaving South Africa does not automatically classify you as a non-tax resident. If you are a tax resident living overseas, you can be taxed on foreign income that exceeds a R1.25 million threshold. You may be affected by double taxation as well.
Tax residency is not the same as citizenship. You can remain a South African citizen, but since you no longer reside in the country, and because you do not have any significant connections to South Africa, you are not taxed in South Africa. On the other hand, non-South African tax residents in South Africa are only taxed on their South African-sourced income, for example, income from a rental property.
However, the process of becoming a non-tax resident in South Africa is not automatic. The only way to change your tax status is to formally undergo the relevant legal processes through SARS.
Understanding double taxation agreements
Tax returns are always to be filed in the country where you are not a tax resident first. It is possible that, in certain instances, a particular amount may be taxed twice since tax systems differ from country to country. Double taxation can however be alleviated through various double taxation agreements (DTAs). By disclosing the tax which you will pay in the country that you are tax resident in, you can usually avoid double taxation.
It is important to get advice from a tax practitioner to determine your tax residency status before you leave South Africa. We recommend that clients moving abroad seek advice from a cross-border tax specialist who is familiar with both jurisdictions.
Benefits of ceasing your South African tax residency
The benefits of tax non-residency are:
- You will only be taxed on income sourced from South Africa (unless the DTA overrides the normal laws).
- Only fixed property located in South Africa and assets of permanent establishments will be subject to capital gains tax.
- International remittances are exempt from taxation.
Tax residency definitions discussed above are for tax purposes only, not for anything to do with Home Affairs or exchange control.
Importance of having a SARS non-residency tax letter
If you are tax resident in South Africa, you are legally required to submit tax returns to SARS every year. You must declare your worldwide earnings, both local and foreign, and then claim any exemptions or tax credits on foreign earnings. If you do not formally note yourself as a tax non-resident, SARS will automatically classify you as a tax resident in South Africa.
Applying for the SARS non-residency tax letter
To be able to apply for the SARS Non-Resident Tax Status Confirmation Letter you must have already completed the ceasing of tax residency process through SARS. Citizens can approach SARS proactively, with the relevant supporting documents, to prove non-resident status. Supporting documents required include (but not limited to):
- A signed declaration indicating the basis on which you qualify;
- A detailed letter of motivation setting out the facts and circumstances supporting the disclosure that you have ceased to be a tax resident;
- A copy of your passport/travel diary.
Once this process has been completed, apply to SARS for the Notice of Non-Resident Tax status letter. If SARS does not issue the letter at the taxpayer's request, this indicates that the taxpayer has not changed their tax residency on their core system or that the change previously made has been deleted, requiring the taxpayer to reapply. This could result in additional costs for the taxpayer due to the inefficiency of SARS.
The non-residency tax letter is important for three reasons:
1. A non-residency tax letter gives taxpayers confirmation that SARS has agreed that their tax status has changed. Currently, there is no other way to confirm that SARS has confirmed that changes have occurred.
2. An emigration tax clearance is now required to get funds paid abroad if withdrawing from your retirement funds prior to retirement. In October 2021, legislation changed for non-tax residents intending to claim a living annuity while living abroad. To transfer funds from South Africa to an overseas bank account, an application for a good standing tax clearance certificate must now be made. Previously, all you had to do was show that you had financially emigrated and the fund could make an offshore payment. Now, the process of accessing your living annuity offshore has become more complicated, particularly for elderly non-tax residents and those who have been out of the country for more than ten years.
3. A non-residency tax letter is used when a non-tax resident needs to take an annuity or salaried income out of South Africa to transfer abroad for the banks.
Note that once you are seen as a non-tax resident by SARS, the Reserve Bank has declared that those individuals are no longer allowed to use their Single Discretionary allowance to transfer funds out of SA. They have to prove they have the non-residence letter from SARS or use their FIA.
It is important to take the necessary steps, knowing that SARS no longer automatically (when they stated they would do this) issues the letter of tax non-residency. Know your tax status and act accordingly so that you are not negatively affected.
William Louw is SA Tax Director at Sable International.