Why you need to sort out your tax-residency status
May, 28th 2018
The lack of clear definitions to determine an individual’s tax resident status has led to different interpretations — resulting in myths and misconceptions, and unintended consequences.
South African residents will be paying income tax on any amount exceeding R1m a year earned abroad. To become a tax nonresident is, however, not that easy.
The Treasury has announced amendments to the Income Tax Act relating to the exemption of income earned by South Africans while working abroad. The change will become effective in March 2020.
Shohana Mohan, head of global employment, expatriate tax advisory at Tax Auditor Solutions, says the South African Revenue Service relies on two tests — the ordinarily resident test and physical presence resident test — to determine an individual’s tax status.
The test for ordinarily resident is fairly subjective and based on the intention of the individual, while the test for a physical presence resident is an objective, fact-based test.
Elana Nel, a senior associate in the tax advisory division of Stonehage Fleming, says the physical presence test is easy to get out of, if the circumstances support it. It is a test conducted every six years and is applicable to people coming to SA or people who have left SA but spend a significant amount of time in the country.
The test requires that in a tax year an individual has to be present in SA for 91 days or more. The individual should also have been present for 91 days or more in each of the previous five years. The person must also have been present for 915 days — combined — in the previous five years. This amounts to 183 days a year.
Some of the mischief is created during an interpretation of the requirements. Mohan says all the requirements must be met for an individual to trigger tax residence status.
The legislation has been misinterpreted by replacing the "and" with an "or" in each of the requirements, resulting in the myth that should an individual meet any one of the requirements he will become a tax resident.
The other test, for ordinarily resident, is more subjective. Nel says there is not one single fact that decides this, but a balance of circumstances. Some questions to consider when applying the test follow. Where is the place that he would return to one day? Where does he have a home to live in? Where does his family live?
Nel says if one passes the ordinarily resident test then he or she is a tax resident, no matter the time he or she has spent in SA in the past six years. One cannot simply "elect" to be nontax resident in SA. "The time people spend in SA can tie into the physical presence test, but they have to break ordinarily residency to cease being a tax resident," says Nel.
According to Mohan, many South Africans who are working abroad on long-term employment contracts are likely to have ceased to be South African tax residents.
The implication is that the person is deemed to have sold his worldwide assets, excluding property in SA, triggering capital gains tax — also referred to as the exit charge, says Mohan, who is a member of the South African Institute of Tax Professionals’ personal tax work group.
The market value of the assets held at the day before a person left SA determine the capital gains tax liability.
Most South Africans working abroad for many years forget to ascertain their tax residence position in SA. The
Treasury is encouraging citizens who left the country many years ago to formalise their tax affairs.
People who want to become nontax residents, who have no intention of returning to SA on a permanent basis, are advised to sever ties at the point of departure and to incur the necessary exit charges then.
Many South Africans are considering doing so now, especially with the looming changes to the taxation of foreign income, but the exit charge might be a deterrent. Many of them forget the deemed exit charge if they left after 2001 when capital gains tax became effective.
If an individual left the country more than 10 years ago, and did not officially change his tax resident status, the tax liability to change it now may be substantial, says Nel. "People will have to calculate what their deemed capital gains tax might be, and weigh it up against the potential income tax liability going forward."
She notes that the capital gains tax liability will be calculated on the individual worldwide assets — the local assets and those accumulated while living abroad.
Patricia Williams, partner at law firm Bowmans, says the postponement of the amendment to the foreign income exemption will give individuals a chance to get their affairs in order. This might be particularly helpful for people who want to take the leap and change their tax status.
However, tax consequences should not be the ultimate driver in making the decision to emigrate or sever ties with SA, warns Mohan.