The general misconception is that when a certain amount of days has been spent in Zambia or certain residency permits have been obtained, protection will be provided under the Double Tax Agreement (“DTA”) between Zambia and South Africa. Effectively, those individuals who have not formalised their emigration through the correct procedures or claimed the correct exemption sections will not automatically be exempt from tax in South Africa.
Explanation for “no worries, there is a DTA”
Firstly, a DTA and any article therein, is never automatically applied for a specific tax position. In practise, the tax position will be confirmed by an independent tax practitioner who will subsequently declare this position on a tax return to the relevant tax authorities. The DTA between Zambia and South Africa, and as latest amended version dating back to 1960, with specific reference to the residency article, has caused several layers of complications for South Africans living and working in Zambia.
Because of its stone aged articles and the missing “tie-breaker” test, this specific DTA has limited the tax mitigation solutions for South Africans. Failure of these South African residents to cease their tax residency status in South Africa, will result in their Zambian earnings also being taxed in South Africa.
What Saffas should have done
South Africa moved from a source-based tax system to a residency-based tax system in 2001. It was the start of the distinction between residents and non-residents for tax purposes where residents are taxed on their worldwide earnings and non-residents only on South African sourced earnings. Unless you have formally ceased your tax residency in South Africa you will still be seen as a tax resident. It is not a process that happens automatically. It must be proved to SARS that you do not fulfil the South African residency tests. If you do not, the deemed disposal of your assets need to take place to determine your “exit tax” payable to SARS.
Individuals working in Zambia who have not ceased their South African tax residency, will still be able to apply the section 10(1)(o)(ii) foreign employment exemption. This exemption is used to protect all foreign earnings derived from an employer-employee relationship if the employee worked for more than 183 days abroad, whereof more than 60 days were consecutive. However, since the 1st of March 2020, this was no longer the case. Now only the first R1.25m of foreign earnings will be tax exempt, including a portion of the tax credits to mitigate tax liability in South Africa.
South Africans who have been working in Zambia essentially needed to declare their foreign earnings to SARS and then claim the exemption if they qualified for it, even before 1 March 2020. The onus is always on the taxpayer to disclose their tax position. Therefore, before your foreign income can be exempt you first need to prove that you meet the necessary requirements of the foreign employment exemption. If foreign income earned in Zambia was not declared until now, and you are selected for an audit, it may lead to prosecution and, ultimately, a fine or imprisonment.
It is imperative that South Africans working in Zambia look at their compliancy with SARS, ensure that all tax returns are up to date and that the necessary foreign earnings were declared before it is too late.
The solution for Saffas in Zambia
It is established that the DTA cannot be applied to have a deemed ceasing of a South African’s tax residency, however, should you have the permanent intention to remain abroad and not to return to South Africa in the foreseeable future there is an alternative option, Financial Emigration.
Alternatively, should the intention be to return to South Africa, all foreign earnings will have to be declared and the foreign employment exemption claimed as a tax mitigation solution.
The answer: Financial Emigration
South Africa being a residency-based tax system allows tax residents to cease their tax residency should they not have the intention to be a tax resident anymore. Proceeding with the Financial Emigration process requires an ethical stance of your intention not to return to South Africa. Upon successful completion, you will be noted as a non-resident for tax purposes and will only need to declare South African sourced earnings to SARS.
Consequently, South Africans that have been working in Zambia with no intention to return in the future, can mitigate their exposure to SARS by financially emigrating and ceasing their tax residency once off.
Rectifying non-compliance of the past
One of the biggest benefits of Financial Emigration is that it can be backdated to the initial date that a South African left with the intention to go work and live abroad. This will ensure that non-residency is established from the date the individual left the country, in which case, only South African sourced earnings need to be declared.
Ignorance is not the answer
SARS has strengthened their campaign against non-compliance, including criminal prosecution steps taken against non-compliant taxpayers. Ignorance will unfortunately not be entertained once non-compliance has been identified. Why take these risks rather than engaging with professional experts on either formalising your emigration status or verifying that the right tax position is taken to ensure optimal compliance.