Moving overseas involves significant tax and financial planning. Many mistakenly believe that relocating from South Africa is enough to end their tax obligations to the South African Revenue Service (SARS). This is not the case. Let’s explore what South Africans need to know about tax and emigration from a practical standpoint.
Understanding the Difference: South Africans Temporarily Abroad vs. Tax Non-Residents
The tax definition of “resident”
To understand the difference between tax residents, expats and non-residents, we must first define tax residency. According to Section 1(1) of the Income Tax Act No 58 of 1962, a resident means any natural person who is:
Ordinarily resident in South Africa, or Physically present in South Africa for a specified duration.
A “resident” does not include someone deemed exclusively a resident of another country under a Double Tax Agreement (“DTA”) that country has with South Africa. Therefore, even though a person may meet the ordinarily resident or the physical presence test, if they are deemed exclusively a resident of another country through application of the relevant DTA, they will be considered a non-resident. Read more here.
South Africans Temporarily Abroad:
A South African temporarily abroad is sometimes referred to as an “expat”. An expat is someone living and working outside their country of citizenship or residence, usually temporarily. These individuals haven’t terminated their tax ties with South Africa. As long as they intend to return to South Africa after their wanderings, they will continue to be ordinarily resident and thus tax resident in South Africa (unless excluded by application of a DTA).
An expat will still have the same tax obligations as any other South African tax resident even though they are spending time abroad. They are required to declare their worldwide income to SARS.
What is Expat Tax?
Expat tax refers to the abovementioned ongoing South African tax obligation of tax residents temporarily abroad. These individuals continue to be taxable in South Africa on their worldwide income, including their foreign employment income.
Employment income may also be taxable based on where the employee is physically present when performing their duties. Thus, an expat may be faced with double taxation if their employment income is taxed in South Africa (the residence country) as well as in the country where they are performing their services (the source country).
Fortunately, the Income Tax Act provides relief to South African expats earning foreign remuneration abroad. Section 10(1)(o)(ii) of the Income Tax Act allows the first R1.25 million of remuneration earned abroad to be exempted from tax in South Africa if certain requirements are met.
Tax Non-Residents:
These individuals have officially severed their tax ties with SARS and no longer meet the criteria for tax residency. As opposed to residents, who are taxable in South Africa on their worldwide income, non-residents are only liable for South African tax on income sourced within South Africa.
They will not pay any tax in South Africa on their foreign employment income if they have gone through the formal process via eFiling to cease their South African tax residency (“tax emigration”).
Emigrating from South Africa does not automatically terminate your tax ties with SARS. Terminating these ties requires formal procedures and declarations to place your non-residency with SARS. This includes the preparation of a letter setting out the facts, a declaration, travel diary, disclosure of any exit capital gains tax due and various other supporting documents. It is essential to follow this process to unburden yourself from having to disclose and pay tax on your worldwide income to SARS.
Conclusion
By understanding these nuances and preparing accordingly, South Africans living abroad can navigate the complexities of expatriate tax and tax emigration more effectively. Our legal and consulting team specializes in facilitating a smooth transition from tax residency to non-residency. For further information, please refer to the related articles.
Joint authorship:
Michelle Tickner; General Practioner (SA) – Head of Department; Legal and Consulting Annelise Heydenrych – Cross Border Tax Consultant