In 2021, the world is an entirely different place to live in as compared to the past, and many South African expatriates face more uncertainty than ever before due to the Covid-19 pandemic. Unfortunately, coinciding with the significant mobility and financial security concerns felt by expatriates was the commencement of the R1,25 million limitation on the exemption provided to tax resident employees on their foreign employment income from 1 March 2020 onwards.
One thing, however, is evident – SARS is already looking at expatriate tax compliance specifically as a key aspect of tax collection and compliance enforcement. This has led to much introspection for taxpayers, with many now considering whether they are seen as South African tax residents, whether they have been compliant in their affairs and if the tax position they are taking is correct.
This is an especially relevant concern for expatriates abroad who –
- intend on returning to South Africa at some point within the foreseeable future;
- do not intend to return to South Africa but cannot objectively prove this; or
- who are completely uncertain as to whether they will return.
In practice, the pitfalls seen most often from an expat tax perspective are taxpayers who have been either incorrectly relying on the application of a DTA, foreign employment income exemption (limited to R1,25 million), or simply not disclosing their foreign income in their returns to SARS. These issues are alarmingly prevalent and pose a prominent non-compliance risk.
Easy Answers, with a Pinch of Salt
With so much uncertainty around, many taxpayers have been heading to SARS for clarity on where they stand. For example, a common question asked is whether a taxpayer would be considered a resident or non-resident for tax purposes, and how this will affect their filing position.
Something that must be made abundantly clear, however, is that this is generally best avoided. It is also a legitimate cause for concern, given that the answers provided to these taxpayers has ranged from the absurd to downright reckless in most cases.
In 2018, the Constitutional Court stated, with reference to a taxpayer’s reliance on SARS’ unilateral interpretation of South Africa’s tax laws, that doing so “is best avoided”. This is the case for many reasons, not the least of which being that the role of SARS is to collect tax revenue, not to help taxpayers avoid tax liability.
Beware of Pie-in-the-Sky Advice
Aside from SARS, another avenue available to taxpayers is to seek advice from a tax practitioner. This is without a doubt, the most appropriate route to follow to get the answers you seek, regarding remaining (or becoming) compliant with your tax affairs.
However, one should be wary of one-size-fits-all approaches or off-the-cuff advice that is usually too good to be true. The simple fact of the matter is that not every player on the field will have their eye on the ball with regard to expatriate tax compliance or SARS’ practices in this regard.
The truth of the matter is that the determination of one’s tax residency is an exhaustive, fact-driven process that involves the consideration of various factors in relation to the taxpayer concerned, including whether this should be determined solely with reference to South Africa’s domestic tax laws or by applying the provisions of a DTA. In most cases, this is simply not correctly done.
This means that, in the first instance, one should look to a consulting firm with a strong in-house legal component, to ensure that the advice provided is drawn from a proper interpretation of the laws concerned. An incorrect interpretation of the law can lead to very damaging consequences for a taxpayer, especially where it concerns one’s tax residency or claiming tax relief in terms of a DTA.
Pinpointing your Position
Filing season for the year of assessment ending February 2021 will soon be announced. During this time, all South Africans who are required to file returns will be subject to a new and improved SARS. This includes South African expatriates who, whether they know it yet or not, will be a particular focus on SARS’ radar with regard to the disclosure of their foreign income.
Small details, such as whether one is an employee or an independent contractor, may completely erode one’s eligibility for exemption and in which case a DTA or formalisation of the termination of their tax residency in South Africa would be a ‘must’ from a tax mitigation perspective. The alternative to this is a potential shock for the taxpayer when an assessment is raised and SARS comes knocking.
There is no legitimate way out of it – foreign income earned by a South African resident expatriate is taxable in South Africa, and leaving these amounts off one’s return is simply not correct – in fact, this is a prime example of non-compliance that (when found by SARS) may very well open a proverbial Pandora’s box for the taxpayer concerned.
Nosedive into Oblivion
For taxpayers with a foreseen tax liability in South Africa on their foreign income, now is the time (if not already passed due) to ensure that they take the requisite steps to remain tax compliant. Taking action now, ahead of the relevant return, is not just highly recommended but most often absolutely necessary where action is needed to mitigate South African tax liability.
Expatriate tax continues to be one of the more contentious issues in recent memory and it is clear that SARS and National Treasury are not letting up. What this means is that South Africans need to make sure that they have the correct advisor to assist them in their circumstances, and take the correct tax position based on a proper interpretation of the law.