South Africans who work or live abroad are facing confusing terminology and mixed signals on their obligations with the South African Revenue Service (SARS). This is not a problem caused by SARS. There is an influx of opportunistic consultants claiming expertise in this area, each trying to find their own voice. Combine this with a little AI stuff and salespeople suddenly talking confidently about international tax, and you've got great entertainment.
International tax is an exact science, and it becomes more complex where you need to navigate it through SARS e-filing which is a rigorous tax compliance platform. Where you hear some qualified lawyers or forex experts without any deep tax knowledge suddenly talking about international tax, removing the emigration terminology from their names exposes the mistakes in a ridiculous manner.
The word 'emigration' is blurring the lines
There are often claims that the term “financial emigration” no longer expires, that expatriates need to undertake “tax emigration”, or that they must be tax residents in another country to claim non-residence – despite SARS records confirming that this is not necessarily a requirement. Other phrases include “abolishing tax residency”, “divorcing SARS”, “immigration”, and the list goes on.
These fancy phrases simply describe the same part of income tax law and exactly the same SARS procedure.
What has changed in the last 5 years?
The underlying tax law on how one ends or begins tax residence has not changed at all. This is the Income Tax Act and South Africa's double tax treaty terminology. The key SARS Interpretation Note 3 and Interpretation Note 4 have seen adjustments to the minimum technical terms. The compliance framework has changed significantly where you are a high net worth individual or family, but this is more due to SARS's access to third party information. The law itself hasn't changed – you just have much faster enforcement.
What has changed is the following: SARS has become the primary authority responsible for verifying and recording the tax residence status of a taxpayer. They replace the central role previously played by the South African Reserve Bank (SARB).
There remains a need to follow a formal process with the South African government. What has changed is the sequence of approvals, which is now SARS-centric rather than the process initiated through SARB before March 1, 2021.
For South African citizens who are registered by SARS as resident taxpayers, SARS must first verify and update their tax residence status, before following the relevant banking and exchange control procedures. This is not designed to specifically target South Africans abroad, but reflects the central role of SARS in the administration of the tax system.
However, this process is not the same for every taxpayer. Foreign nationals who are already registered by SARS as non-residents for tax purposes will generally not follow the same procedure, as South African tax residence status will not expire.
SARS has the information and resources to verify compliance, confirm that taxes have been properly accounted for, and determine whether taxpayers are in good standing. Once the relevant SARS procedures have been completed, the taxpayer's bank can satisfy the relevant exchange control requirements.
What does the law say
Having practiced as an international tax lawyer and advised South Africans abroad on cross border tax and financial matters for many years, I can confidently highlight the following fundamental legal principles:
1. South Africans can cease to have South African tax residence in two different ways:
- By demonstrating that they are no longer ordinarily resident in South Africa; Or
- By demonstrating that, under the applicable double tax agreement, they are exclusively tax resident in another jurisdiction.
2. The burden of proof is on South Africans. You may be treated as a tax resident under SARS law and may be liable for worldwide income tax, capital gains tax and estate duty; Where the taxpayer has not discharged his burden of proof. This responsibility of the taxpayer is both procedural and objective under the law. The taxpayer must follow the necessary steps to demonstrate that they are no longer tax resident in South Africa. Merely stating an intention to leave South Africa is insufficient. SARS will consider all relevant facts and circumstances before reaching any conclusion.
3. Where reliance has been placed on a double taxation agreement, the taxpayer must similarly certify the situation for each year of assessment in which the treaty relief is claimed. This is where most inexperienced tax advisors, forex agents and policy encashment specialists get it completely wrong – claiming non-residence with SARS using the ordinary residence route versus the double tax treaty route has different consequences for the client.
4. South Africans living abroad must ensure that SARS records accurately reflect their tax residence status. Many people simply assume that a previous advisor or family friend participated in the process correctly, without verifying how SARS records their tax residence status. They must confirm that SARS records correctly reflect their status and, where recognized as non-resident, obtain SARS confirmation of that status.
If SARS recognizes 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 for 5 years under law, but personally I recommend you keep it permanently. This is useful not only in South Africa, but wherever you call home in the future.
You May Not Care About SARS Compliance, But You Should: 3 Reasons Why
First, the Tax Administration Act obliges taxpayers to ensure that the information provided to SARS is accurate and up-to-date. Failure to comply may, in some circumstances, constitute a criminal offence. This in itself should be warning enough to most South Africans that it is simply unwise to be on the wrong side of SARS's world-class system.
Secondly, your tax status determines how SARS treats your third-party data received from around the world. This is at the core of global frameworks such as Automatic Exchange of Information (AEOI) and OECD's Common Reporting Standards (CRS) and 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-resident status, the South African source-of-income principle applies. However, if you are still an ordinary resident taxpayer, taxation applies on your worldwide income.
Third, many South Africans maintain nexus with their country of birthplace, making correct tax status and compliant tax records non-negotiable for general ease of living because:
A. You may inherit from South Africa.
B. You own or plan to own property in South Africa. Well, there are still some of the best quality property options in the world!
C. You may still have a South African bank account, investments, retirement annuities or pension interests, or you may wish to transfer funds out of South Africa in the future.
D. As many South Africans acquire overseas assets, they become homesick and have the means to spend more time in South Africa, and South Africans returning home from permanent residence abroad contact our firm weekly. The flow of foreigners retiring to South Africa is proof that the country still offers world-class living standards and accessible quality healthcare.
Good news: a streamlined process at low cost
The legal question has always been whether the taxpayer remains a South African tax resident or has ceased to be a South African tax resident under the applicable legal principles. This is not a new requirement, but nor is it any longer a tick box exercise on tax returns. Now it requires a set of documents to prove non-residence for SARS.
With the change in SARS-centric process, it has become easier to regularize one's cases, ensuring greater efficiency and ease. As a result, costs have also reduced significantly.
For taxpayers whose circumstances only require a straightforward update of their South African tax residence status, professional assistance for the entire process is possible for less than R4,000 on a standard case.
Taxpayers should employ expert border crossing professionals who can ensure prompt, compliant and correctly structured submissions to SARS. Incorrect applications, or applications submitted without a holistic understanding of the taxpayer's profile and history with SARS, run the risk of the tax authority asking additional questions or flagging the profile for verification and audit.
However, taxpayers should also be wary of claims that the process is unnecessarily complex to justify higher fees for these services.
It is based on regularizing your affairs
Regardless of the terminology used by different advisers, it comes down to regularizing your cases with SARS to demonstrate that you are no longer resident in South Africa. The best outcome you can get is formal confirmation from SARS that you are permanently non-resident on their records for tax purposes. Where your cases are more complex or you require a much older application, it is not a risky process when working with a team well versed in handling more complex and sensitive cases.
Written by Delano Abdol, LLB LLM: Cross-Border Taxation at Tax Consulting SA, and Asmkelle Tayla and Carmen Sevenster, Expatriate Tax Assistance Specialist at Tax Consulting SA