Burden of Proof- Section 102 of the Tax Administration Act:
Expatriate tax resident of South Africa needs to be cognizant of the fact that the onus lies on them to prove to SARS that they ceased their tax residency.
This system works on two principles (a) the onus is on the taxpayer to declare their tax position, and (b) the taxpayer then bears the onus of proof, on a balance of probabilities, to evidence their tax position.
There is, unfortunately, a lot of misconceptions in this regard as most expatriates believes that if they pass the physical presence test, they automatically have ceased their residency, and therefore, need not to declare their foreign earned income. Ceasing your tax residency is not something that automatically occurs, your change of status from resident to non-resident must be formally done through a declaration process to SARS.
Expatriates need to formally cease their residency if they have the permanent intend to reside abroad, otherwise if they do intend to return to live in SA there are other tax legislations that can be used to limit foreign income tax liability to SARS. Nonetheless if one is a tax resident they have to declare their worldwide income to SARS.
Exit tax/ Deemed disposal
Unfortunately, many expatriates think that if they have been outside of the country for number of years and have no financial ties connecting them to South Africa, they are safe from any tax liability in SA, which is a very risky misconception.
While the expatriate income tax cap legislation was enacted after 2020, expatriates were always legally obligated to declare their foreign income to SARS, even if it was exempt. Therefore, one of the most important things to ask yourself is whether you went through what is called the ‘Exit Tax’?
This event is triggered once you formally cease your tax residency, SARS will take the difference between the original value of your capital assets and the market value of those capital assets on the day before you ceased tax residency, to determine if there is a Capital gain which may be taxable. It is one of the most important aspects of ceasing your tax residency because it ensures that you have ceased your residency with a SARS recognised process and they can no longer treat you as a tax resident regarding those assets again.
Important to note that only South African property in your name is exempt from exit tax, most other capital assets are fair game to SARS. If you haven’t ceased your tax residency, you are at risk of having all of your capital assets being part of the exit tax in terms of section 9H of the Income Tax Act.
If you departed years ago you also are putting yourself at risk of having penalties and interest accrue, as stated above the onus is on you, the taxpayer to prove that you are compliant, and SARS only has to raise a red flag in terms of your tax profile.
The silver lining: Backdating
SARS has given people the unique opportunity to rectify the fact that they did not formally cease their tax residency when they have departed. Backdating means you can formally cease your tax residency using the date that you departed (subject to you having the documentation to prove that date). It is important to note that this is not the easy way out because as mentioned above SARS can still pose a penalty or interest because of your non-compliancy if you have not declared your foreign income.
Backdating to your date of actual departure means that the foreign assets and foreign income acquired after departure will be safe. This is the only rope that SARS is willing to give non-compliant taxpayers
When will I qualify to cease my residency?
To break or cease your residency, there are two tests that will be considered. Firstly, we have the ordinarily resident test. To pass this test, you must have the intend to reside abroad permanently. Objective factors, such as if you have the right to live or work abroad, if your spouse resides abroad with you and any other factor that contributes to your intent will be considered in this regard.
The other residency test that exists is the physical presence test. This test looks to the time you have been and will be spending outside of South Africa. The criteria are to be out of SA for longer than 91 days in total during the year of assessment under consideration, 91 days in total during each of the five years of assessment preceding the year of assessment under consideration and 915 days in total during those five preceding years of assessment. This test is considered secondary to the ordinarily residence test.
Does my family need to cease their tax residency as well?
The ordinarily resident test firstly needs to be broken. It is therefore important to note that if you are married to a South African spouse, irrespective of the marriage being in community of property, out of community of property or a marriage in terms of the Civil Union Act, your spouse needs to cease their tax residency as well. If your South African spouse does not cease their tax residency with you, it can be seen as a contradiction to your intent, which may lead to you failing to break the ordinarily resident test.
The question is if it will be seen as a contradiction of you intent if your children do not reside with you abroad. If you have minor children, which never worked in South Africa, and they may inherit from a South African source, it is best to cease their residency for future tax planning. If this is not the case, then the children will be low risk in regards of their SA tax residency. This will not influence the parents’ tax residency.
SARS has increased their focus on expatriates and will not back down, with the new legislation going as far as criminal prosecution on taxpayers who unwillingly declared incorrectly or evaded a declaration; therefore it is not just the imposition of penalties and interest that you need to worry about, but also the fact that you could be prosecuted for not declaring correctly or owing SARS. A debt to Sars does not prescribe after three years, it can take up to 30 years, therefore it is vital to check your status and to make sure that you are compliant in all respects.
Ceasing your tax residency is not a one size fits all process, that is why it is important to seek advice from a professional who will be able to apply the process according to your needs and circumstances. The onus is on you to make sure that you, as the taxpayer are compliant. SARS is making sure that they get what they feel they are owed, do not get caught in the firing line, when all could have been resolved.