DALLE-E

Before 2001, the South African income tax system was a source-based tax system. This is where tax is levied only on income generated within South Africa. With effect from 1 March 2001, the South African tax system follows a residence-based tax system. This only applies to “natural persons” (i.e. individuals) and not companies.

This means that an individual who is a South African “resident” (as defined for tax purposes) is liable for income tax in South Africa on their worldwide income, i.e., all the income they earn, no matter where it is earned. On the other hand, non-residents will only be liable for income tax on income generated from a source located within South Africa.

Section 1 of the Income Tax Act 58 of 1962 defines a “resident”, in respect of an individual, as a person who is either an “ordinarily resident” (an undefined term) in South Africa or physically present in South Africa for a specified period (“physical presence test”). The two tests are mutually exclusive and must be considered independently.

Determining an individual’s tax residency status

The first step is to determine if the individual is “ordinarily resident” in South Africa. The test is subjective as it involves an enquiry into an individual’s intention, specifically if they have an intention to live in South Africa with a certain degree of permanency, even if they reside elsewhere.

In Cohen v CIR 1946 AD 174, it was determined that an individual would be “ordinarily resident” in “… the country to which they would naturally and as a matter of course return from their wanderings; as contrasted with other lands it might be called their usual or principal residence and it would be described more aptly than other countries as their real home.”

If a person does not meet the “ordinarily resident” test, the physical presence test must be applied. The physical presence test focuses solely on an objective metric: The number of days spent in South Africa. Therefore, an individual will be a South African tax resident when they spend the following number of days in South Africa:

1. More than 91 days in aggregate during the current year of assessment; and
2. More than 91 days in aggregate during each of the five years of assessment preceding the current year of assessment; and
3. More than 915 days in aggregate during the five years of assessments preceding the current year of assessment.

If you’re unsure of your tax residence status, it’s important to consider the two tests above.

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.