Viewed from the perspective of South African expatriates abroad, this often makes the transition from resident to non-resident (even temporarily) a relatively easy decision to make.
The common misconception among these expatriates, however, is that departing from South Africa and relocating to a temporary destination will trigger SARS to automatically regard them as non-resident taxpayers. This is incorrect. A formal process must be followed to cease one’s South African tax residency status. Failing to do so, SARS may audit the misinformed expatriate, who will still be subject to tax on their worldwide income. It is crucial, then, to understand how the transition to a non-resident tax status operates with reference to the Double Taxation Agreements (DTA) into which South Africa has entered.
Determining the initial tax residency status
Determining a natural person’s tax residency status is generally the starting point in understanding their tax liability under the Income Tax Act (the Act). Many perceive the consideration of whether a natural person is a tax resident or not as a simple enquiry when applying the definition of ‘resident’ under section 1(1) of the Act. However, this is not the case, especially when it is reliant on the impact of a DTA. At the risk of stating the obvious, the ‘initial’ tax residency of a natural person is triggered, either by them being (a) ordinarily resident in South Africa; or (b) physically present in South Africa for certain prescribed periods.
Notwithstanding these principles, the definition’s proviso allows a South African tax resident to become non-resident under the provisions of a DTA. This means, among other things, that those expatriates who are abroad but have the intention to remain ordinarily resident in South Africa can elect to inform SARS of their ceasing to be a tax resident (albeit temporarily). The qualifying criteria, however, will depend on the application of those DTAs that contain a treaty-specific definition of a resident. Again, this does not occur automatically.
As a quick recap of the basics of whether an expatriate is eligible to become a non-resident in terms of a DTA; they should first confirm whether there is a DTA in place between South Africa
and the host country. If so, the following broad requirements may be considered:
• Whether they are also regarded as a tax resident in the host country;
• Whether it is their intention to permanently return to (and remain in) South Africa at some point in the foreseeable future; and
• Based on that intention, whether their personal facts and circumstances would be supportive of the socalled ‘tie-breaker test’ contained in the applicable DTA.
We all know that the tie-breaker test in a DTA between South Africa and a host country, in the majority of cases, will resolve the conflict of a person who is found to be a tax resident of both contracting states. However, careful guidance necessitates that one only proceeds to the tie-breaker test once a residency ‘tie’ factually exists. For example, take the wording of Article 4(2) of
the DTA between South Africa and the United Arab Emirates in which its treaty-specific definition reads as follows:
“2. Where by reason of the provisions of paragraph 1 of this Article an individual is a resident of both Contracting States, then that individual’s status shall be determined as follows . . . ” (own emphasis).
This makes the issuance of a valid certificate of residence from the foreign revenue authority or a letter from the authority indicating tax residency in that foreign country (if available), the gateway document for SARS’ recognition that a South African expatriate has ceased tax residence under the tie-breaker test. In the absence of this gateway document to confirm foreign tax residency on a date aligned with the effective date indicated on SARS’ Notice of Non-Tax Resident Status records, many South African expatriates may be incorrectly taxed as non residents — days, weeks or even months sooner than a DTA permits.
“At the risk of stating the obvious, the ‘initial’ tax residency of a natural person is triggered, either by them being (a) ordinarily resident in South Africa; or (b) physically present in South Africa for certain prescribed periods”
SARS’ request for relevant supporting documents
Recently encountered in practice on a daily basis is the fact that taxpayers who want to update their tax residency status to nonresident, owing to the application of the DTA, will be requested by SARS to submit the following relevant supporting documents:
– The signed declaration indicating the basis on which they qualify.
– A letter of motivation setting out the facts and circumstances in detail to support the disclosure that they have ceased to be a tax resident.
– A copy of their passport and travel diary.
Of importance from a client-risk management perspective is the fact that these documents are required, in addition to the colloquial ‘tax residency certificate’ from a foreign revenue authority. This, in turn, makes it evident that the cessation of tax residency in South Africa (whether permanently or temporarily) is by no means a box-ticking exercise.
Changing an expatriate’s tax resident status through a DTA is complex, knowing that more frequent and detailed enquiries by SARS are focused on those claiming to cease their South African tax residence. Having said that, these individuals should definitely seek assistance from cross-border taxation professionals who are well equipped to manage the entire process.