The financial and tax implications of emigration is often discussed. In the first of our three-part series on emigration, we’ll look at the concept of “residence”, as most of the South African income tax and exchange control consequences (both pre- and post-emigration) is determined by residency.
There are essentially three concepts of residence:
- Home affairs residency (citizenship, passports, visas, permits etc.)
- Residency for exchange control (Excon) purposes
- Residency for income tax purposes
Although there are some principles relating to these three residency types that do overlap, they are not the same thing and need to be clearly distinguished. For example, a common misconception is that if you emigrate for Excon purposes, you also cease to be a South African tax resident or vice versa, which is not necessarily the case.
So let’s take a look at Exon residency and SA income tax residency.
For Excon purposes, a “resident” is any person (i.e. a natural person or legal entity) who has taken up permanent residence, is domiciled (i.e. legally considered to live in South Africa) or registered in South Africa. Excon residency cannot be “broken” automatically (which is possible for income tax purposes).
The only way to cease to be an Excon resident is to formalise the process of emigration for exchange control purposes. This is officially done by the South African Reserve Bank through authorised dealers, but more on this in the next blog.
This is a very important consideration since South African Excon residents are restricted in how they can expatriate funds abroad.
Income tax residency
There are two tests to determine if you’re a South African tax resident. One is very factual and based on the number of days you physically spend in South Africa. The other, that of being “ordinarily resident” is, however, an abstract concept and based on various factors.
There is no formal definition of what “ordinarily resident” means – the information available has been developed in our courts over many years and it’s essentially a factual question. SARS has summarised these developments into a useful Interpretation Note. Some of the questions used to determine if you are “ordinarily resident” are:
- Where is your habitual abode, i.e. the place where you stay most often, your present habits and way of living?
- Where is your place of business and personal interests, family, employment and economic factors?
- What is your nationality? Remember, residency/nationality for home affairs purposes doesn’t necessarily translate to income tax residency.
So basically, the essence of the test is where you call your “real home”. There are also no hard and fast rules and each case is judged on the facts.
Even if you aren’t a South African tax resident based on being “ordinarily resident”, you can still be a tax resident based on the number of days you spend in South Africa.
The “days” test, which can only be triggered after 5 years, should be performed on an annual basis and should meet each of the three criteria below:
- Being physically present in SA for an aggregate number of 91 days during the tax year;
- Being physically present in SA for an aggregate number of 91 days during each of the previous 5 tax years; and
- Being physically present in SA for an aggregate number of 915 days during those 5 tax years.
Since the “days” test is performed annually, it’s relatively easy to manage your affairs in such a way as to not meet the criteria and not be considered a South African tax resident (at least on this test).
Once you have determined where you are a resident for exchange control purposes and for income tax purposes, the financial implications of emigration should be considered and discussed.
However, an increase in emigration discussions also led to an increase in incorrect information available in the public domain. Taxpayers should be cautious of accepting information at face value, and rather consult the experts as incorrect information can lead to unintended consequences.
In the next blog, we will continue where we left off, assuming that you’re a South African Excon and tax resident, looking to emigrate. We will share some tax implications and the practicalities of financial emigration with the South African Reserve Bank and SARS. In our third and final emigration blog, we’ll look at where income from different sources is taxable, once you have emigrated.
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