Experts on Expat Tax (part one)

De Wet De Villiers Latest, Tax Tuesday

The term ‘residence’ is extremely important when you are considering the financial and tax implications of emigration. 

‘Residence’ may be

  • Residence based on citizenship (i.e., home affairs residency),
  • Residence for exchange control (Excon) purposes or
  • Residence for tax purposes.

In this article I’ll focus on the two forms of residency that cause the most confusion: Excon residency and tax residency. 

Tax residency 

A tax resident is a natural person who is ordinarily resident in South Africa or a natural person who meets all the requirements of the physical presence test. These two tests are mutually exclusive and must be considered independently from each other. You are considered a tax resident if you meet at least one of these tests.

The first step in determining a natural person’s tax residency status is to determine if a person is ‘ordinarily resident’ in South Africa. Only if the answer to that question is no, should the physical presence test be applied. 

Ordinarily resident test

Although both tax residency tests necessarily consider where a person spends their time,  physical presence is not a definitive factor for the ordinarily residence test. Rather, physical presence is only one of several factors, none of which is determinative.  The ordinarily resident test is subjective because it involves an enquiry into an individual’s intention. Specifically, a person’s intention to reside in South Africa on a permanent basis. For example, although you have the possibility of returning to South Africa in the future, if you intend to continue living in the United Kingdom indefinitely, you don’t meet the requirements for South African tax residency. 

Nevertheless, this determination remains a factual question which can be supported by factors such as:

  • habits and way of living; 
  • place of business, personal interests, and family; and 
  • nationality. 

The crux of the ordinarily resident test is based on where your ‘real home’ is located. This would have to be decided on a case-by-case basis depending on the facts and circumstances of each scenario. 

Should you not be a South African tax resident on the basis of the ordinarily resident test, you can still be a tax resident of South Africa if you meet all the requirements of the physical presence test. 

Physical presence test

The physical presence test (also known as the ‘days test’) determines that a natural person is a tax resident of South Africa if that person was physically present in South Africa for specified time periods in the year of assessment, even though they may not have been ‘ordinarily resident’. 

This test must be performed on an annual basis irrespective of the fact that it can only be triggered after a period of 5 years. The days test requires compliance with the following: 

  • The taxpayer must be physically present in South Africa for a total of more than 91 days in the current year of assessment and for each of the five previous years of assessment; and 
  • For a total of more than 915 days over those five consecutive tax years.

On this basis it is always advisable to maintain a travel log which serves as proof of the number of days that an individual spends in South Africa. 

Excon residency 

The concept of residency for Excon purposes is distinct from tax residency. 

Before 1 March 2021 a resident for Excon purposes referred to any person, including a natural person or a legal entity, who is legally considered to reside in South Africa. Such a person is considered to have taken up permanent residence in South Africa. 

The concept of emigration for Excon purposes has been phased out since 1 March 2021. As a result, the control and regulating of an emigrant’s remaining assets via a capital account has fallen away. 

The current stance is that an individual, upon deciding to take up permanent residence elsewhere, must inform SARS that they have ceased to be a South African tax resident.  A tax compliance status for “emigration” from SARS would have to be requested before an individual will be allowed to transfer any funds abroad. 

Both the South African Reserve Bank and SARS have confirmed that the previous emigration process can be followed, provided that the emigration application was made to an authorised dealer before 1 March 2021.

The financial implications of emigration should be considered and discussed as soon as an individual has determined where they are resident for both income and Excon purposes. 

Tax Tuesday

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts at AJM Tax share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday.

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