Many South Africans have permanently left the country, or are planning to leave. Unfortunately, many are under the false impression that their tax obligations automatically cease when they leave.

“The onus remains on the taxpayer to prove the tax position they are taking”, says Thomas Lobban, Tax Associate at Tax Consulting SA. He further states “it is not as simple as clicking the non-tax resident box on an income tax return”.

The tests

South Africans who are living and working abroad, must satisfy two tests to determine their tax status. The one is the ordinarily resident test and the second is the physical presence test. If they are considered tax resident in SA in terms of these tests they will be taxed on their world-wide income.

The change to the tax treatment of foreign employment income – effective from 1 March 2020 – has prompted many South Africans to carefully consider their tax status.

Only R1.25 million of foreign income is now tax free. In order to qualify for this exemption, the taxpayer must be outside the country for 60 continuous days and 183 days in total during a twelve-month period, and the income must be employment income – independent contractors are excluded.

Individuals who have been residing in another country may still satisfy the physical presence test for South African tax residency. They must consider whether they have been in SA for more than 91 days in total during the current year of assessment, as well as 91 days in total in each of the five years of assessment preceding the current tax year, and whether they have been in SA for more than 915 days in total during the five years preceding the current tax year.

Even if the person is no longer considered ordinarily tax resident because they have no intention of returning to SA, they may still be tax resident if the physical presence test applies to them, and vice versa.

The DTA’s

The additional question to ask is whether the taxpayer is considered tax resident in the country where he is earning foreign income. SA has entered into Double Tax Agreements (DTA) with dozens of countries, in order to limit instances where tax is levied twice on the same income.

Taxpayers can, in many cases, seek relief under the Double Tax Agreement. When a taxpayer is considered to be tax resident in SA, but is also tax resident in another country it is important to obtain a tax residency certificate in the foreign country.

“That will serve as prima facie evidence that they are considered tax resident there. One will apply the tie-breaker test under the relevant DTA to establish where that person is considered to be tax resident for the purposes of that DTA” says Lobban. Depending on the outcome of this tie-breaker test, the DTA will determine which country will have the taxing right of the taxpayer’s income.

It can be quite complicated. “That is why it is essential to have a competent advisor to guide you through the process.”

Many South Africans have been opting for financial emigration when leaving the country on a permanent basis. They have broken ties with SA for exchange control and tax purposes.

However, financial emigration is not a viable option for all taxpayers, especially for those who only have a short-term intention to leave and will be returning to SA. “Their very next alternative is to seek relief under the DTA.”

Zero-tax jurisdictions

Lobban explains that many South African expatriates are working in zero-tax jurisdictions such as the United Arab Emirates.

The fact that an individual does not pay taxes in the other jurisdiction makes no difference, as the DTA assigns the taxing right under the tie-breaker clause to one country or the other regardless of whether tax is actually paid there. If the taxing right is assigned to a zero-tax jurisdiction, then so be it – this is where the “tax” will be paid.

However, if they are still considered to be tax resident in SA (and cannot find relief under the tie breaker clause of the DTA) while working abroad in a zero-tax jurisdiction, they have limited tax relief.

Generally, a taxpayer will receive tax credits (for tax already paid in the foreign jurisdiction on income earned) in order to reduce their tax liability in SA. This relief is generally available to taxpayers in terms of the provisions of domestic SA tax law or, alternatively, under a DTA. However, even where the DTA assigns the taxing right to the foreign country, a taxpayer will still be liable for taxes on income derived from a source in South Africa.

“If they are working in a zero-tax jurisdiction this tax credit relief is not available. They need to be mindful of these facts. If they cannot financially emigrate, or they do not find complete tax relief under the foreign employment income exemption, it becomes especially crucial to plan ahead,” advises Lobban.

Burden of proof falls on the taxpayer

Whichever route a taxpayer takes to find relief, they need to be well prepared. Lobban says many taxpayers move abroad and satisfy themselves that they no longer have any tax obligations to the South African Revenue Service (SARS) because they are not living in SA.

SARS, having disagreed with this view, has raised taxes retrospectively for the time the South Africans have been living abroad and neglected to disclose their income.

Besides the tax liability, SARS has also levied penalties and interest because the taxpayers never took the time, effort or did the necessary due diligence to show that they are non-resident for tax purposes.

The first step is to understand your tax status, what are the options in terms of tax relief and to ensure that all the steps are in place to satisfy the onus of prove that stands with you.

“If you are not able to prove the position you have taken, it will result in a prejudice to the taxpayer, in the form of an adverse liability,” warns Lobban.