By Carla Rossouw
If you are considering relocating or working abroad, it is important to understand the tax implications that come with these decisions. Failure to be well informed about your tax residency status and obligations could result in significant tax liabilities.
There is a myriad of confusion around this issue, which is impacting those leaving the country and those who have left the country many years ago.
The challenge is that there is no one-size-fits-all approach, given that there is no clear definition of tax residency in the Income Tax Act.
Clearing up confusion
The first point to note is that there is no such thing as formal, final or financial emigration anymore. This was the process you would have followed with the South African Reserve Bank (SARB) when you wanted to inform them that you were giving up your South African residency status, in order to externalise funds. The assumption made by many at the time was that you also automatically ceased to be a South African tax resident. But that wasn’t necessarily the case.
The revised process as of March 2021 is to engage with the South African Revenue Service (Sars) to cease tax residency, and to not confuse tax residency with concepts like citizenship and nationality.
When you cease tax residency you don’t automatically renounce your citizenship, and vice versa. In other words, when you renounce your citizenship, you could still be deemed a South African tax resident and be liable for tax.
In addition, it is important to understand that you could still be considered ordinarily tax resident in South Africa even though you are not physically present in the country. Failure to properly manage tax residency can lead to unexpected tax liabilities and complications, particularly for individuals working abroad with the intention to return to South Africa.
Tax residency forms the basis on which you are taxed in South Africa. South African tax residents are liable for tax in South Africa on worldwide income. Non-residents are only liable for tax in South Africa on what is considered South African-sourced income.
Sars uses various tests, which are well documented in Sars Interpretation Notes on the Sars website, to ascertain whether you are a South African tax resident.
Breaking tax residency
Breaking tax residency via the Sars tax emigration process is a once-off event that should only be contemplated if you have no intention of returning to South Africa. You can, however, also cease tax residency on an annual basis via the application of a Double Taxation Agreement (DTA).
We still see unfamiliarity with the process of cessation through the application of the DTA, which means that if you are working offshore but have not ceased tax residency, you may be taxed on the same income twice. This is what a DTA – an agreement that varies from country to country – tries to address. Essentially the DTA allows individuals to end up with only one country being assigned exclusive taxing rights to the income.
The website of the Organisation for Economic Co-operation and Development (OECD) contains the country-specific tax rules, which determine when a person is tax resident in a foreign jurisdiction, and this should be consulted.
The implications of breaking tax residency are significant, potential exit charges and residual tax implications.
The exit charge is important because you need to make sure you have sufficient liquidity available to settle this liability. This tax is triggered on the day you get on the aeroplane and leave the country. Provisional tax payment is due immediately.
Individuals should be aware of their tax obligations and to notify Sars of any changes in residency status, and to avoid the temptation to remain silent.
There is nowhere to hide. Today foreign regulators vigorously share information between one another, especially given the rise of common reporting standards between OECD countries. If a revenue authority picks up any information which ‘links’ you to South Africa, they are obligated to share that with Sars. The system has become sophisticated and Sars would be within their rights to enforce penalties if you owe tax. Failure to inform Sars may also hamper your access to your retirement funds, which only become available three consecutive years after you’ve ceased tax residency.
Living annuity income
Rossouw explains that South African legislation specifically prohibits the transfer of living annuities to other financial service providers abroad. So, if you have moved abroad and have ceased your tax residency, you may still incur a tax liability on your annuity income. The issue arises because this income falls within the South African tax net.
The income-generating activity of a living annuity is the active management of the underlying portfolio. Therefore, the annuity income earned by non-resident living annuitants is considered South African-sourced income. Like South Africa, most countries impose tax on the worldwide income earned by a resident of that country as well as on non-residents’ locally earned income. This inconsistency between residence and sourced-based tax can result in individuals being taxed twice on the same income.
To address this, the DTA comes into play. However, there is a complication: investment managers are mandated to deduct Pay As You Earn (PAYE) unless a tax directive is obtained from Sars, which investment managers are not authorised to obtain on behalf of clients.
This process is cumbersome and time-consuming. It's worth noting that directives are valid for three years, but a certificate of tax residency must then be provided annually.
Navigating your tax obligations can be a complicated and daunting task. We recommend you enlist the services of an authorised tax practitioner to assist if you have already ceased tax residency, and work with your financial adviser if you are planning to cease tax residency in the future.
* Rossouw is the head of Tax at Allan Gray.
PERSONAL FINANCE