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New Legislation On Expatriates

South Africans who are living and working abroad as an employee must take note of the new legislation which has already taken effect from 1 March 2020. It is extremely important for expats subject to employment contracts to determine whether they will have to pay South African income tax on remuneration earned in a foreign country.
South African tax residents who are working and living overseas are required to pay South African tax of up to 45% on their foreign employment income (which includes benefits such as accommodation, travel and security to name a few) if the expat earns or receives benefits of more than R1.25 million in the ensuing tax year.
The new legislation has created some panic and several South African’s are considering financial emigration through the Reserve Bank without understanding the full implications. This is a knee-jerk reaction, the repercussions of which could result in a failed emigration which in turn could mean not being able to return to your beloved South Africa in your retirement one day. It could also result in the backpay of taxes if you return to South Africa within 5 years of emigration.
There are ways to achieve tax residency outside South Africa without having to emigrate financially. We caution you to seek professional advice before making any drastic decisions.
This newsletter attempts to put this into perspective and to set aside the common misconceptions leading to such panic.
Does this affect you?
The new legislation ONLY affects:
  • South African tax residents as defined by The Tax Act or a Double Tax Agreement; AND
  • Salaried employees (if you are an independent contractor, you do not fall into this provision and your full world-wide earnings have always, and will always, be fully taxable in South Africa unless a double tax agreement assists you); AND
  • The services are rendered in a foreign jurisdiction for:
a. At least 183 full days (a full day means 24 hours (from 0h00 to 24h00));
b. of which 60 days are continuous;
c. during any 12-month period touching the tax year concerned
If all the above requirements are met, a South African tax resident will fall into the amended legislation mentioned above.
It is common belief that if you have financially emigrated through the Reserve Bank, you are safe and are not vulnerable to this new legislation. This is an incorrect and dangerous assumption.
It is common belief that if you have financially emigrated through the Reserve Bank, you are safe and are not vulnerable to this new legislation. This is an incorrect and dangerous assumption.
Now what?
There is no one-size fits all answer, but the following considerations do provide some guidance:
1. Are you a South African tax resident or not?
An individual will be considered to be a tax resident of South Africa when one of the following tests are applicable:

1.1. You are “ordinarily resident” in South Africa.

“Ordinarily resident” is not a clearly defined concept, instead it is guided by case law and must be evaluated on a case-by-case basis. An individual will be considered a tax resident (“ordinarily resident”) of South Africa if South Africa is the place you return from your wanderings.
If you believe you are not an “ordinarily resident” in South Africa, your circumstances and actions should echo that. South African Revenue Service (SARS) Interpretation Note 3 (“Resident: Definition in relation to a natural person – ordinarily resident”) provides guidance by listing certain factors that should be considered. This is not an exhaustive list:
  •  The natural person’s most fixed and settled place of residence;
  • The natural person’s habitual abode, that is, the place where that person stays most often, and his or
    her present habits and mode of life;
  • The place of business and personal interests of the natural person and his or her family;
  • Employment and economic factors;
  • The status of the individual in the Republic and in other countries, for example, whether he or she is
    an immigrant and what the work permit periods and conditions are;
  • The location of the natural person’s personal belongings;
  • The natural person’s nationality;
  • Family and social relations (for example, schools, places of worship and sports or social clubs);
  • Political, cultural or other activities;
  • That natural person’s application for permanent residence or citizenship;
  • Periods abroad, purpose and nature of visits; and
  •  Frequency of and reasons for visits
1.2. You are not considered to be “ordinarily resident” in South Africa in the tax year, but you meet the requirements of the “physical presence” test;
These requirements are that you must be physically present (within the tax year) in South Africa for a period or periods exceeding –
  • 91 days in aggregate during the year of assessment in the current year; and
  • 91 days in aggregate during each of the five years of assessment preceding the current year; and
  • 915 days in aggregate during the five preceding the current year.

1.3. Where a double tax agreement (DTA) exists between South Africa and the country you are working in

the definition of residency in this agreement trumps all. It is the overriding and dominant rule. You may fall into the definition of a resident per 1.1 and 1.2 above, however the DTA may very well exclude you. You would have to consult with an international tax expert to obtain sound advice in this case.
2. Has your tax residency changed by financial emigration?
Receiving approval from the South African Reserve Bank (SARB) to financially emigrate does not necessarily mean that you will no longer be considered a South African tax resident.
The financial emigration approval from SARB will support your case with SARS, however, on its own, it will not be adequate. You will be required to take proactive steps to inform SARS about your intentions as mentioned in 1.1 of the preceding paragraph.
In the budget speech presented by Tito Mboweni on 26th February 2020, there was confirmation that Treasury has the intention to allow individuals who work abroad more flexibility, provided funds are legitimately sourced and the individual is in good standing with SARS. Individuals who transfer more than R10 million offshore will be subjected to a more stringent verification process. Such transfers will also trigger a risk management test that will include certification of tax status, the source of funds and assurance that the individual complies with anti-money laundering and countering terror financing requirements prescribed in the Financial Intelligence Centre Act (2001). This will be phased in by 1 March 2021.
Under the new system, natural person emigrants and natural person residents will be treated identically. Additional restrictions on emigrants have been repealed, such as the restrictions on emigrants being allowed to invest and the requirement to only operate blocked accounts, have bank accounts and borrow in South Africa. The concept of emigration as recognized by the Reserve Bank will be phased out, to be replaced by a verification process based on the requirements above. Tax residency for individuals will continue to be determined by the ordinarily resident and physically present tests as set out in the Income Tax Act (1962), subject to the Double Tax Agreements. Under existing international standards, South Africa participates in the automatic sharing of information between tax authorities on individuals’ financial accounts and investments. These cooperative practices will remain in place to ensure that South African tax residents who have offshore income and investments pay the appropriate level of tax. The above measures may make the need to financially emigrate superfluous.
3. Terminating my South African tax residency?
There are only three ways to do this:
  1. You are no longer an ordinarily resident in South Africa. In other words, you state that you want to become ordinarily resident in a foreign country (a country other than South Africa) and you take steps to prove your stated
    intention. See 1.1 above; or
  2. You are not an ordinarily tax resident in South Africa and you are not physically in South Africa for a continuous period of at least 330 full days; or
  3. A Double Tax Agreement will deem you a non-resident (This takes precedence)
4. How do I let SARS know that I am not a tax resident of South Africa?
It is simply a block that you tick in your tax return. The wizard will ask you what date you became a non-resident and you will automatically be required to declare a deemed sale of your worldwide assets and pay capital gains tax thereon. This will have to be paid over to SARS before the end of the tax year in which you make this declaration to avoid penalties and interest.
SARS may audit your non-tax residency status and require proof that you are a non-resident motivated by the persuasive bullet points in 1.1 above.
If your tax residency changed in a previous tax year and the capital gain was triggered but not declared, the best possible avenue for you is to submit a VDP (Voluntary Disclosure Program) declaration to eradicate any potential penalties and prosecution.
On the other hand, if you have financially emigrated from South Africa, you can notify SARS once you apply for your emigration tax clearance certificate via E-filing. This will make your intention to cease tax residency in South Africa known to SARS.
5. If I break my tax residency in South Africa, will I still have any tax liabilities in South Africa?
If you cease to be a tax resident in South Africa there is a deemed capital disposal, which means you are deemed to have sold all your world-wide assets at fair market value. The tax cost can be substantial. The only assets that are excluded from the deemed disposal are immovable assets in South Africa and ‘permanently established” businesses.
Once you become a tax non-resident in South Africa, you will only be taxed on South African sourced income such as rental from properties situated in South Africa and will still be required to submit a non-resident income tax return with SARS. If, however you no longer received any income from a South African source and you are not a South African tax resident anymore, you will no longer be required to submit an annual income tax return.
6. What happens if I’m a tax resident in more than one country?
If you are a taxpayer in more than one country, you should find out whether South Africa has entered into a Double Tax Agreement (DTA) with that other country. An individual can only be an ordinary resident for tax purposes in one country at a time. The DTA is the document which provides that guidance.
What is very important to understand is that the DTA takes precedence over domestic law.
Please see the link for a list of all the DTA’s South Africa has in place with other countries: https://www.sars.gov.za/AllDocs/LegalDoclib/Agreements/LAPD-IntA-DTA-2013-01%20- %20Status%20Overview%20of%20All%20DTAs%20and%20Protocols.pdf
If you are a tax resident of South Africa and you receive foreign remuneration that exceeded R1.25 million and there is no DTA in place between South Africa and the country of your foreign employment, or the DTA doesn’t provide sole taxing rights to a country, this means both countries have taxing rights on the remuneration received and the only relief would be a deduction of the foreign tax on your South African tax return
Don’t go it alone!
As with most things’ “taxy”, the issues are complex, and every person has a bespoke set of circumstances which could present all sorts of nuances and outcomes. If you find yourself vulnerable to the provisions described in this article, we strongly advise that you seek expert tax advice.
Sources
(Source: National Treasury, Budget Review, annexure E)
(Source: SARS, Interpretation Note 3, Issue 2, Ordinarily Resident)
(Source: Allan Gray, Carla Rossouw, New tax laws for expats)
(Source: SARS, Interpretation Note 4, Issue 5, Physical Presence Test)
(Source: SARS, Interpretation Note 16, Issue 3, Foreign Employment Income)
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