“It is still possible for an expatriate to cease tax residency in South Africa, on a permanent basis, provided they can prove their intention and capability to leave the country for good,” says Thomas Lobban, Legal Manager: Cross-Border Taxation at Tax Consulting South Africa. Lobban holds a Master of Laws (LLM) in Tax Law.
According to him, such emigrants need a professionally compiled roadmap that incorporates their long-term goals and the means to bring them about, which may be necessary to convince SARS of their changed status.
Ceasing tax residency
South Africans are, in general, legally obligated to declare their worldwide earnings to SARS and pay income tax on it for the rest of their lives, regardless of which country they physically live in. Even after they leave South Africa, they continue to be registered with SARS as residents for tax purposes, unless they undergo a formal process to cease their South African tax residency. This status should be differentiated from “residency” for immigration purposes.
In many cases, they are also required to make submissions to the tax authority in the jurisdiction where they reside, potentially resulting in double taxation of their income. Although double taxation can typically be mitigated through double taxation agreements (DTAs) and tax credits between countries, these are not automatically applied. Some countries do not have DTAs with South Africa at all.
In the past, tracking down South Africans who evaded tax was a difficult task for revenue authorities, but times have changed. “SARS now has the technological and legal capability to identify non-compliant taxpayers abroad and, through various interjurisdictional agreements, knock on their front door via local law enforcement,” says Lobban.
It therefore pays for emigrating South Africans to cease residency for tax purposes with SARS as soon as possible, provided they can objectively support their intention to reside outside the country indefinitely, except for short stays like holidays.
The Ordinarily Resident problem
To determine if a person has indeed left South Africa permanently, SARS applies the “Ordinarily Resident” test, which considers the subjective intention of the taxpayer as supported by objective factors (such as documentary evidence and on a balance of probabilities).
“Unlike physical presence, location of assets or economic activity, Ordinary Residency tests the true intention of an expatriate, in particular whether they will one day return to South Africa as a matter of course, such as for retirement, taking many factors into account,” explains Lobban.
Those who are considered non-resident under this test may undergo a process to formally cease their South African tax residency and may then be granted a Non-Resident Tax Status Confirmation Letter from SARS, releasing them from all future tax obligations on their foreign income.
Obviously, anyone moving to a country that does not allow permanent residency would appear to fail by default. In fact, the litmus for the test remains a mix of intention (objectively supported) and means. “For example, buying a retirement home in a second country that does award permanent residency could well be a good indicator of future intention and means,” says Lobban.
Roadmap to freedom
A detailed roadmap that contains the relocation plans of a taxpayer, where they are in a country that will not allow permanent residence, is essential in this case. Yet, it cannot generally be a standardised set of steps or questions answered, as each emigrant will have different goals, resources and options available to them.
In addition, the subjective complexity of the Ordinarily Resident test demands that they seek professional guidance. It may seem economical to find the cheapest tax practitioner but if they are not legal experts in this area, the applicant should potentially be concerned. They may fail the test, pay more in the long run or even discover that, years later, they are still very much joined at the hip with SARS.
“Assisted by a legal advisor who is well-versed in tax law and SARS’ tests, you will be ideally equipped to make your case and cut ties to South African tax, confident that it is truly permanent,” says Lobban.