International tax is an exact science, and it becomes more complex where you need to navigate this through SARS e-filing which is a rigid tax compliance platform. Where you listen to some well-qualified attorneys with no deep tax knowledge or foreign exchange experts suddenly talking international tax, their name dropping of emigration terminology exposes in a comical way the fault lines.
The ‘Emigration’ Buzzwords Blurring the Lines
There are frequent claims that the term “financial emigration” no longer exits, that expatriates need to “tax emigrate”, or that they must be tax resident in another country to claim non-residency – despite SARS being on record confirming that this is not necessarily a requirement. Other phrases include “ceasing tax residency”, “divorcing SARS”, “immigration”, and so the list goes on.
These fancy phrases simply all describe the same part of Income Tax Law and exactly the same SARS process.
What Has Changed in the Last 5 Years?
The underlying tax law on how one ceases or commences tax residency has simply not changed. This is the Income Tax Act and South Africa’s Double Tax Treaty wording. The key SARS Interpretation Note 3 and Interpretation Note 4 have at best seen minimal technical wording adjustment. Where you are a high-net-worth individual or family, the compliance framework has significantly changed, but this is more because of SARS’ access to third-party information. The law itself has not changed – you just have much sharper enforcement.
What has changed is the following: SARS has become the primary authority responsible for verifying and recording a taxpayer’s tax residency status. They have replaced the central role previously performed by the South African Reserve Bank (SARB).
The requirement to follow a formal process with the South African government remains. What has changed is the sequence of approvals, which is now SARS-centric, rather than a process initiated through the SARB prior to 1 March 2021.
For South African nationals who are recorded by SARS as resident taxpayers, SARS must first verify and update their tax residency status, before the associated banking and exchange control processes can follow. This is not a design specifically targeting South Africans abroad but reflects SARS’ central role in administering the tax system.
The process is, however, not identical for every taxpayer. Foreign nationals who are already registered by SARS as non-residents for tax purposes would not ordinarily follow the same process, as there is no South African tax residency status to cease.
SARS has the information and resources to verify compliance, confirm that taxes have been correctly accounted for, and determine whether taxpayers are in good standing. Once the relevant SARS process has been completed, the taxpayer’s bank can then attend to the associated exchange control requirements.
What the Law Says
Having practised as an international tax attorney and advised South Africans abroad on cross-border tax and financial matters for many years, I can confidently highlight the following fundamental legal principles:
- South Africans can cease South African tax residency in one of two distinct ways:
- By demonstrating that they have ceased to be ordinarily resident in South Africa; or
- By demonstrating that, under an applicable Double Tax Agreement, they are exclusively tax resident in another jurisdiction.
- The onus of proof rests on South Africans. SARS can under law treat you as tax resident and liable for world-wide income tax, capital gains tax and estate duty; where the taxpayer has not discharged their onus of proof. This taxpayer responsibility is both procedural as well as objective under law. The taxpayer must follow the necessary steps to demonstrate that they have ceased to be tax resident in South Africa. Simply stating an intention to leave South Africa is insufficient. SARS will consider all the relevant facts and circumstances before reaching a conclusion.
- Where reliance is placed on a Double Taxation Agreement, the taxpayer must similarly substantiate that position for each year of assessment in which treaty relief is claimed. This is where most of inexperienced tax consultants, forex agents and policy encashment experts get it completely wrong – claiming non-residency with SARS using the ordinarily residency route vs the Double Tax Agreement route has different outcomes for the client.
- South Africans living abroad must ensure that SARS’ records accurately reflect their tax residency status. Too many simply assume that a previous advisor or family friend correctly attended to the process without ever verifying how SARS records their tax residency status. They should confirm that SARS’ records correctly reflect their status and, where recognised as non-resident, obtain SARS’ confirmation of that status.
If SARS recognises you as a non-resident for tax purposes, obtain your official SARS Notice of Non-Resident Tax Status and this valuable record must be retained under law for 5 years, but personally I recommend you keep this permanently. It is useful not just in South Africa, but wherever you in future call your home.
You May Not Care About SARS Compliance, But You Should: 3 Reasons Why
Firstly, the Tax Administration Act obliges taxpayers to ensure that information provided to SARS is accurate and up to date. Failure to comply may, in certain circumstances, constitute a criminal offence. This in itself should be warning enough for most South Africans that being on the wrong side of SARS’ world-class system is simply not smart.
Secondly, your tax status determines how SARS treats your third-party data received from all over the world. This is at the core of Automatic Exchange of Information (AEOI) and global frameworks like the OECD’s Common Reporting Standard (CRS) and the US Foreign Account Tax Compliance Act (FATCA) compliance.
All financial institutions, including banks and investment firms, must report your details to SARS. Where SARS’ records correctly reflect your non-residency status, the South African sourced-income principle applies. However, if you are still a normal resident taxpayer, taxation of your worldwide income applies.
Thirdly, many South Africans retain a nexus with their birth country, making the correct tax status and a compliant tax record non-negotiable for ordinary ease of living because:
- You may inherit from South Africa.
- You own or plan to own property in South Africa. By the way, still the best quality property options in the world!
- You may still have a South African bank account, investments, retirement annuities or pension interests, or wish to transfer funds from South Africa in the future.
- As many South Africans find overseas wealth, they miss home and have the means to spend more time in South Africa, and our firm is weekly contacted by South Africans abroad returning home permanently. The inward flow of foreigners retiring in South Africa is testament to the country still offering world-class quality of living and accessible quality healthcare.
The Good News: A Streamlined Process at Lower Cost
The legal question has always been whether a taxpayer remains a South African tax resident or has ceased to be a South African tax resident under the applicable legal principles. It is not a new requirement, but neither is it a tick box exercise on a tax return anymore. It now requires a set of documents to substantiate non-residency to SARS.
With the transition to a SARS-centred process, regularising one’s affairs is simpler, ensuring greater efficiency and ease. Consequently, the cost has also reduced significantly.
For taxpayers whose circumstances require only a straightforward update of their South African tax residency status, professional assistance for the whole process is possible for below R4,000 on a standard matter.
Taxpayers should engage expert cross-border tax professionals who can ensure quick, compliant and correctly structured submissions to SARS. Incorrect applications, or those submitted without a holistic understanding of the taxpayers’ profile and history with SARS, carry the risk of the tax authority asking additional questions or flagging the profile for verification and audit.
However, taxpayers should also be cautious of claims that the process is unnecessarily complex simply to justify higher fees for these services.
It Boils Down to Regularising Your Affairs
Regardless of the terminology used by different advisors, it boils down to regularising your affairs with SARS to reflect that you are no longer resident in South Africa. The best outcome you can obtain is formal confirmation from SARS that you are permanently on their records a non-resident for tax purposes. Where your affairs are more complex or you need the application far back dated, this is not a risky process when dealing with a team well-versed in also handling more complex and sensitive matters.
