The residency test is very important for any foreigner coming to South Africa or for any South African going abroad. The reasons being primarily that:
- When you are resident of South Africa you pay tax on your worldwide income and as a non-resident you only pay tax on your South African “source” income and certain beneficial exemptions apply; and
- When you loose your South African tax residency, for instance you go work abroad and your circumstances dictate that you become non-resident, there is a deemed disposal of certain of your assets for capital gains tax purposes and this may cause some cash flow problems.
An individual will be tax resident in South Africa by applying the following tests:
Firstly, you will never be tax resident in South Africa should you be tax resident, in terms of a double tax agreement entered between South Africa and a tax treaty partner, in the partner country. An example will be where you go and work in the United Kingdom and you become a full tax resident there while you do not have available accommodation in South Africa. The double tax treaty between South Africa and the United Kingdom will then determine that you are exclusively resident in the United Kingdom and the result is that you become non-resident for South African tax purposes.
Provided the above does not apply, you will be South African tax resident as long as you are “ordinarily resident” in South Africa. The meaning of “ordinarily resident” is that you consider South Africa your real home and plan to return to South Africa. This is the reason why many South Africans overseas remain “ordinarily resident” in South Africa and also the reason why foreign workers coming to South Africa on expatriate assignments ever become “ordinarily resident”.
When you are not treaty resident in another country and you are not “ordinarily resident” in South Africa, it is still possible for you to be tax resident because of a days test. The test determines whether you are tax resident in South Africa for a particular year of assessment and has two legs:
- You are resident if you are, measured over six tax years, more than 91 days in of each of these years in South Africa; and
- In the first five of these six years, you are more than 915 days in South Africa
Should the test be met you will be tax resident in South Africa for the sixth tax year.
The South African Revenue Service now asks specific questions to the above effect in your personal income tax return and has become a lot more aware and active in enforcing the residency tests.