As a newbie on the team, I recorded some noteworthy insights into ceasing tax residency: The dividing line between resident and non-resident taxpayers may seem straightforward, but to formally cease to be a tax resident with the South African Revenue Service (SARS) can bring both tax relief and costly consequences that catch expatriates off guard.
Here are five essential facts I have learned about ceasing tax residency – many of which you will not find in a textbook.
Leaving South Africa is Easy; Leaving SARS Requires the Golden Letter
Ceasing South African tax residency by obtaining the SARS Notice of Non-Resident Tax Status — often called the ‘Golden Letter’ — triggers what is commonly known as an exit tax. This is a deemed disposal applicable to qualifying assets. In practice, SARS deems you to have sold at market value certain assets under section 9H in the Income Tax Act No.58 of 1962, the day before your effective date of ceasing tax residency.
Certain assets are specifically excluded from the exit tax event, such as immovable property situated in South Africa held by that person, any assets which are effectively attributable to a permanent establishment in South Africa, South African retirement fund interests, and personal-use assets.
SARS then levies capital gains tax (CGT) on that deemed sale. The logic is simple: South Africa wants to claim its fair share of tax on the growth of your wealth while you were still a resident. For many taxpayers with qualifying assets, some being foreign investments, crypto assets, or trusts, this can translate into a substantial tax bill.
Selling South African Immovable Property as a Non-Resident? Here is the Catch
While immovable property situated in South Africa is excluded from exit tax, non-residents face a different regime, which brings withholding tax into play for CGT purposes. In terms of this system, before making payment to a non-resident seller, the purchaser must withhold a portion of the purchase price and pay it over to SARS. This mechanism is designed to facilitate the collection of CGT on capital gains made by non-residents and applies to property which has been disposed of in excess of R2 million. The withholding tax obligation is made on the gross selling price, with the following rates applicable:
- 7.5% where the seller is a natural person;
- 10% where the seller is a company; and
- 15% where the seller is a trust.
This is something non-residents must plan for. Even once you have left the borders of South Africa, SARS ensures that the line is firmly drawn when it comes to collecting tax on property sales.
Split-Year Residency: The Hidden Trap
The picture can be more complex for those who work part of the tax year in South Africa and part in a new host country. In such instances, an IRP5 will reflect income earned in South Africa, even if the taxpayer has already moved abroad and submitted a request to update their tax residency status to non-resident. Until SARS verifies such request and formally processes the cessation of tax residency on their records, the individual is still required to file a tax return as a resident, meaning their worldwide income remains taxable in South Africa. Failing to disclose this income while still technically a tax resident can lead to audits, penalties, and even disputes that should be best avoided by timeously consulting tax experts.
SARS Sees More Than You Think
If you assume SARS only knows what you choose to declare, think again. Domestically and internationally, SARS taps into an extensive network of third-party data sources to verify income streams.
Locally, it requires banks, insurers, medical aid schemes, retirement funds, and investment managers to submit prescribed electronic reports with information about taxpayers’ activities, known as the IT3 series. These include IT3(b) for interest and dividends, IT3(c) for capital gains, and a medical aid tax certificate for medical aid contributions, among others.
Internationally, through the Automatic Exchange of Information framework, tax authorities around the world automatically share financial account information. You cannot hide.
SARS does not rely on taxpayers’ honesty. It cross-checks declarations against hard data, ensuring that what you declare aligns with what the numbers reveal about your income.
Ceasing Tax Residency Is Not About Packing Bags — It Is About Paperwork
In addition to the minimum required documents, SARS may request additional supporting documentation when ceasing tax residency. Some include:
- Details of any property that you may still have available in South Africa, indicating the purpose for which such property is being used.
- Details of your social interests, e.g., gym contract, recreational clubs, and societies.
- Details of any business interest, e.g., investment and employment that you may still have in South Africa.
What many non-residents are unaware of is that even after ceasing your tax residency, you may still be required to file a tax return, particularly in the year of assessment of your effective date of ceasing tax residency. Without this, SARS may continue to treat you as a resident and tax you accordingly.
If you are considering emigration, do not leave loose ends behind. Get advice, file accurately, and prove your case before SARS proves it for you.
