In January of this year, the government signed the Taxation Laws Amendment Act, doing away with the distinction between residents and non-residents for exchange control purposes. What exactly does this mean? It means that the SA Reserve Bank is doing away with financial emigration, which involves accessing your retirement annuities before they are matured to take them out of the country. This is something everyone usually does before immigrating and could be considered quite a setback for some.
SARS has quite a series of measures in place to conclude your tax residency status and ascertain if you should be paying tax in South Africa, whether you are living in Australia, England, or bouncing around Europe. These measures start with figuring out how much time you spend in SA and where your family and assets remain.
What is tax emigration?
Tax or financial emigration involves informing SARS that you will be changing your tax status. As a South African tax resident, you pay tax based on your worldwide income and worldwide asset base. A non-tax resident, on the other hand, only pays tax on their South African sourced income and South Africa sourced asset base, which is why being classified as a non-resident is seen as beneficial.
Once SARS has determined how you will get taxed, the South African Reserve Bank (SARB) will regulate how your money moves in and out of the country. Home Affairs will then document your citizenship status and rights in and out of SA.
How SARS determines your tax status
- The ordinarily resident test
Although this is entirely subjective, you’ll be considered an ordinarily resident if your permanent home is in South Africa. This definition includes those living in a place with some degree of permanence, a permanent home, have their belongings stored, and regularly return following temporary absences. SARS will see you as residing somewhere else permanently and not a SA tax resident if these don’t seem true of your lifestyle.
- The physical presence test
This test is entirely time-based and applicable to someone who is not considered an ordinarily resident. Basically, you will need to prove that you have been physically present in SA for a period or periods exceeding 91 days in aggregate during the tax year under consideration. You will also need to show that you were in SA for 91 days in total during each year of the five tax years preceding the tax year under consideration. And 915 days during the above five preceding tax years or 183 days a year over these five years.
- Double Taxation Agreement (DTA)
The DTA is an agreement held by South African and many other countries. They are agreed-upon tax legislations to ensure that each country knows what taxing rights they have against their taxpayers. This means that the DTA will make sure you are not unfairly taxed in South Africa and the corresponding country. Great, so, no double taxation for you. This will come into play if you are earning an income in South Africa and the other country, or if you are a tax resident in SA with no income from a SA source and are earning from a foreign company.
Important things to note:
- The onus is on you to inform SARS that you will be changing your tax status, in the same tax year. If you don’t tell them, they will consider you a SA tax resident.
- If there is tax due to SARS when you change your status, you may have to face hefty administrative penalties for non-declaration and non-payment.
- You must communicate tax emigration in the tax return covering the period you change your tax status.
- The day before you become a non-resident for tax purposes, you will be deemed to dispose of your worldwide asset base at market value – triggering Capital Gains Tax or an exit charge. You are then considered to repurchase it – all for tax purposes. (Fixed property in SA is excluded from this equation.)
- SARS deems an additional period of assessment when you are changing your tax status and will require a provisional tax return to be done if your taxable income exceeds R1 million in that tax year. If taxes are owed, they will be due on the day you leave the country.
- After you become a non-resident, you don’t need to submit SA tax returns unless you still have assets left in the country that are generating income streams.
If there’s one thing to take from all of this, it’s vital to understand that changing your tax residency does not mean you automatically undergo financial emigration. You may not even benefit from applying for tax emigration. It’s essential to speak to the experts as the process can be arduous and complicated. Contact Dirmeik Consulting for professional services to take care of the process for you and advise you on the way forward.
Consider the experts
Are you changing your tax status? Want to find out more about financial emigration? Give us a call, and we can help you through the process. Dirmeik Consulting has an extensive understanding of tax and VAT laws and can give the correct and up-to-date advice on all your tax matters. We make sure to keep up to date with any new rules or regulations made by SARS.
Dirmeik’s tax experts can advise on all South African tax matters and endeavour to create the best solution for you and your business. Get in touch with us on our website.