Archive for category: SA Tax Residence – personal

Written by Hugo van Zyl CA(SA) TEP MTP(SA) 10 November 2019

You emigrated from South Africa! Really? What’s next?

Did you correctly emigrate from South Africa and what is you understanding of “emigrated”?

The Income Tax Act use the words “cease to be a resident”. Tax specialists, like writer prefers to add the word resident. The reason being, there is a difference between a tax resident and and an Exchange Control resident!

Being a person not resident for tax (tax non-resident) brings certain benefits, obligations and and often switch off certain tax exposures, but not all!

Once solely tax resident in a treaty country, you may escape SARS Income Tax but not SARS Estate Duty!

Yes, Countries like Mauritius and UAE have forced heirship or Sharia Succession rules, yet this does not remove the estate duty (situs or death taxes) in South Africa!

Reference: https://taxmigration.com/2019/09/20/taxmigration-vs-financialemigration/ – I gratefully acknowledge Hugo van Zyl’s authorship of this article:

Eventually we have SARS buy-in and confirmation that formal emigration is not a tax act process.

What we now need is SARS and all tax practitioners to stop using a brand name to refer to a SARB process referred to as “to formalise their Emigration ” an Exchange Control resident

I am often challenged about the term #taxmigration not being defined or referred to, anywhere in any tax act! It is correct, it is not a defined term, it is my brandname hence http://www.taxmigration.com

Equally so, financial emigration is a brand name and through rather controversial press articles the group behind the name got the world to use their brand name. Credit to their marketing strategy but its now time we go back to basics and true facts!

Formal Emigration is the correct and preferred word, and hopefully soon the following SARS extract will correctly refer to Formal Emigration

What is the impact of financial emigration on tax residence?

Acquiring approval from the South African Reserve Bank to emigrate from a financial perspective is not connected to an individual’s tax residence. Financial emigration is merely one factor that may be taken into account to determine whether or not an individual broke his or her tax residence. An individual’s tax residence is not automatically broken when he or she financially emigrates. The deciding factor remains whether or not an individual breaks his or her ordinary residence.

Source: SARS webpage

The above extract is not necessarily 100% correct!

The last sentence should perhaps have read:

The deciding factor remains whether or not an individual breaks his or her tax residents status because of DTA or tax treaty rules and tiebreakers or because they are truly no longer ordinarily (yes, not ordinary but ordinarily) resident.

The above mentioned extract is not the only place where the SARS webpage needs urgent attention. The following FAQ extract is also incorrect or at least incomplete:

What qualifies an individual as a non-resident?

An individual is regarded as a tax resident of SA if he or she is ordinarily resident in South Africa or meets the requirements of the physical presence test. If neither of these apply, the individual will be regarded as a non-resident.

For more information on these two tests, please refer to the Guide on the Residence Basis of Taxation for Individuals 2008/2009.

Source: SARS FAQ pages

The correct wording, we respectfully submit should be:
What qualifies an individual as a non-resident?

An individual is regarded as a tax resident of SA if he or she is ordinarily resident in South Africa or meets the requirements of the physical presence test. If neither of these apply, or should a person be deemed to solely tax resident in a DTA or treaty country, the individual will be regarded as a non-resident.

The SARS Glossary R page is indeed technically more sound where it states (and we selectively quote):

Resident

As defined in section 1 of the IT Act– Includes: Any natural person who is ordinarily resident in South Africa; or Any natural person who complies with the physical presence test; and …, but: Excludes any person who is deemed to be exclusively a resident of another country for purposes of the application of any agreement entered into between the government of South Africa and that other country for the avoidance of double taxation.
Source: SARS Glossary R

Formal Emigration vs. Financial Emigration- what is the difference?

Their is no such process as financial emigration! It is a brand name cleverly marketed by certain product suppliers. Tax law solution (to cease tax residency as envisaged in ITA section 9H) purposefully (or is it dangerously?) confused with a lucrative business to assist with Formal Emigration

What then is the true wording or correct SARB terminology to use and what is the source for this?

We quote from SARB FAQ pages:

In terms of exchange control policy, private individuals (natural persons) who reside permanently in a country outside the Common Monetary Area are required to formalise their emigration by completing a Form MP336(b).

In conclusion

We call on all tax practitioners, authorised dealers, journalists and forex dealers to rather revert to the correct terminology:
Formal Emigration

Expat tax change from 1 March 2020: Treatment of taxation on foreign remuneration
by Fanus Jonck | Feb 7, 2019 | Migration news, News

Expat tax change from 1 March 2020: Treatment of taxation on foreign remuneration
At the moment there is a tax exemption in place for South Africans: If you are out of the country for 183 days or more with at least one trip of 60 consecutive days (not applicable for crews of ships), then foreign income earned while outside of South Africa is exempt from tax in South Africa. This is in terms of Section 10(1)(o)(ii) of the Income Tax Act, 1962 (Act No. 58 of 1962). This exemption is still in place, but the South African Revenue Service (SARS) has indicated that from 1 March 2020 this exemption will only apply up to a maximum of R1 million in earnings. This is the only change: A cap was introduced on this exemption.

Therefore, if you work abroad and earn R100 000 per month (R1,2 million per year) the maximum amount that would potentially become taxable is R200 000. There are however a number of other tests and/or factors to take into account.

Tax residency test
The test for tax residency is that any individual who is ordinarily resident (defined in common law) in South Africa during the year of assessment or, failing which, meets all the requirements of the physical presence test will be regarded as tax resident. A person is regarded as being ordinarily resident in the county where his or her primary home is and driven by intention, employment, location of personal belongings and where their family is situated. If ordinary residency cannot be determined, the physical presence test is a 5-year test of how much time you spend within South Africa. Having South African citizenship, a South African ID book or South African passport does not by default make you a South African tax resident.

For example, if you have sold your house in South Africa and you and the family have moved to New Zealand, you rent or own a house in New Zealand, your kids go to school in New Zealand and you are working there, then it is more than likely you are not a tax resident of South Africa. The new amendment therefore will be of no significance to you, as SARS can only tax non-residents on what they earn from a source within South Africa. You therefore don’t need to financially emigrate to not pay tax.

Double tax agreement protection
South Africa has about 60 double tax agreements (DTAs) with different countries. Most of these agreements were based on the same model, applying the rule that the country in which the taxpayer worked for 183 days or more per year would normally be the country with the rights to tax the employment income. Therefore, if you work outside of South Africa – in a country that South Africa has a DTA with – for more than 183 days, then your employment income is not taxable in South Africa because of this DTA protection.

For example: Mrs Jordaan and her husband go work in Germany for 18 months. They keep their house in South Africa and are in Germany temporarily, with the intention of returning to South Africa and are therefore tax residents of South Africa. In terms of Section 13 of the DTA we have with Germany and because they are there for more than 183 days, the income is only taxable in Germany. They don’t have any tax due in South Africa and the change will not affect them.

Foreign tax credits
Any foreign tax you pay would also be credited against your South African tax. For example: During the 2020/2021 tax year you work in France for 4 months, where you earn R800 000 and 15% tax is deducted. You then go work in Belgium for 6 months, where you earn another R800 000 and 20% tax is deducted. Your total foreign income would be R1,6 million and you would have paid R280 000 in tax. Because you are tax resident, your foreign income above R1 million will become taxable and therefore R600 000 of your earnings become taxable. The tax due in South Africa would be ± R179 000. You have already paid R280 000 in tax, so there would be no further tax due.

Who will be affected?
The new amendment will affect the following persons:

A South African tax resident working temporarily abroad and who earns more than R1 million while working in a country which does not have a DTA with South Africa and does not have enough tax deducted; and
A South African tax resident working temporarily abroad, earning more than R1 million and working in several countries (not more than 183 days in any of them) and not having enough foreign tax deducted.

LONDON SEMINAR 9 July 2019

Hugo van Zyl’s article – https://www.thesouthafrican.com/south-african-expats-foreign-employment-income-tax/

How foreign employment income tax will impact South African expats
Do not believe the fear mongers suggesting you must emigrate formally to correct non-compliance.
Hugo van Zyl by Hugo van Zyl – 2019-01-29 11:01 – in South Africans Abroad

The current hype into formal emigration being the absolute and final solution to escape the tax consequences of the new #Tax2020 rule has resulted in too many expats South Africans incorrectly opting for formal emigration.

Any expat that is concerned about the pending changes should immediately ask the following question: Did I file all my tax returns up to February 2018 and am I correctly registered as a provisional taxpayer? Being tax exempt does not exempt you from tax filing obligations.

Before one gets overly concerned about the March 2020 [#Tax2020] liability, you need to address the issue of outstanding and overdue tax returns. Anyone impacted by the new rules should have been tax filing with SARS.

If not tax filing for some years, one must ensure you have correctly tax emigrated and paid your exit levy on time. Doing a financial emigration in the current tax year, will not shield you against tax penalties and interest on the unpaid taxes.

Do not believe the fear mongers suggesting you MUST emigrate formally (Financially Emigrate [FE]) to correct non-compliance and to protect you against the new rules. Tax emigration and not financial or formal emigration dictates your SARS exposure

Before we consider all the incorrect and half-truths out there, one should first determine the exact rules, consider the legislature’s intention behind the changes and then only apply it to one or more specific cases. This handrail is not able to address all the typical scenarios. We will, however, attempt to identify three or four typical examples we have seen in recent times.
The new rules affect 1 March 2020

The rules only apply to tax residents, albeit that they reside outside SA.
It follows that once you tax emigrated, having told SARS of the exit and paid your exit tax on worldwide assets, you are no longer required to report foreign income (be it remuneration of passive investment income) to SARS.
For this reason, many expats are keen to tax emigrate, yet sadly they are unwillingly and unnecessarily coerced into financial emigration also known as formal emigration.
No longer will the full extent of foreign employment income earned be fully tax exempt.
SA tax residents and only tax residents will, as has been the case in the past, must report the full extent of foreign income to SARS.
Currently, on assessment SARS will unilaterally tax exempt the total income from tax
Tax residents spending +183 days outside of South Africa, rendering
employment services will only be exempted up to the first R1million of their employment income (referred to in the act as remuneration) earned abroad;
tax residents will still be required to have spent a continuous period of at least 60 full days, rendering employment services outside South Africa, during any 12 months to qualify for the exemption
Any foreign employment income more than R1 Million will, as of the 2021 tax year, commencing on 1 March 2020, taxed in South Africa, applying the normal individual tax tables.
The effective tax rate will be determined with reference to the aggregate worldwide income and deemed income, reduced by the first R1 million in respect of foreign income from employment.
If so taxed on remuneration exceed R1 million, the tax resident will be able to claim a foreign tax rebate with SARS, alternately, the taxpayer can rely on the various tax treaty benefits.

The Treasure Explanatory Memorandum [EM], issued in 2017, justifies and explains the changes as follow:

“Tax residents who spend more than 183 days outside of South Africa rendering employment services will now only be exempted up to the first R1 million of their employment income earned abroad. The R1 million exemption will provide relief for lower to middle-income South Africans working abroad.

“Any foreign employment income earned over and above this amount will be taxed in South Africa, applying the normal tax tables for that particular year of assessment. Residents will still be required to have spent a continuous period of at least 60 full days, rendering employment services outside South Africa, during any 12 months to qualify for the exemption.”

Keywords and tax phrases to be understood

Remuneration from employment – the word remuneration as used in the SA Income Tax Act, 1961 as amended [ITA], does not define remuneration. SARS Interpretation Note is quick to remind the taxpayers that the 4th Schedule or PAYE rules’ definition is not relevant in the main body of the
Resident – resident, has been defined for tax and Exchange Control [Excon] purposes, yet either of the two set of rules deals with or refers to the other
The Excon rules does however deems a non-citizen in possession of a green bar-coded ID or Smart Card ID, to be an Excon Resident
See the Excon Guide extract below that refers to a permanent resident. Therefore the Home Affairs decision to grant indefinite residential stay and employment rights has a direct impact on the Excon Resident rules
There is no reference in the Excon Resident definitions speaking to tax residency, and vice versa.
Tax resident – Although the actual law changes do not refer to residents, it is trite law that only tax residents can and need to claim the foreign income exemption, as foreign income of a tax non-resident is not subject to our ITA; yet
tax resident does not include any person who is deemed to be exclusively a resident of another treaty country; provided
that where any person that is a resident ceases to be a resident during a year of assessment, that person must be regarded as not being a resident from the day on which that person ceases to be a resident
Emigrant, nor non-resident is defined in the ITA, yet
For purposes of Excon is defined as South African resident who is leaving or has left South Africa to take up permanent residence or has been granted permanent residence in any country outside the CMA
Excon Resident – as defined and deemed in terms of Excon manuals
Resident, for formal emigration [FE} purposes means any natural person who has taken up permanent residence.
For the purpose of the Authorised Dealer Manual, any approved offshore investments held by South African residents outside the CMA, will not be Excon resident
However, such entities owned by Excon Residents (albeit a company in SA) remains subject to Excon rules and regulations
Excon non-resident – as defined in the Excon manuals issued by SA Reserve Bank [SARB]
Non-resident means a person (i.e. a natural person or legal entity) whose normal place of residence, domicile or registration is outside the CMA
Emigrants mean a South African resident who is leaving or has left South Africa to take up permanent residence or has been granted permanent residence in any country outside the CMA.
From practical experience, we know SARB may allow, say UAE based expats to formally emigrate, despite them not being able to register as a permanent resident of UAE or say Dubai.
Non-residents for Excon purposes include:
Any natural persons from countries outside the CMA who are temporarily resident in South Africa, excluding those on holiday or business visits, i.e. a person on work visas or retiree visa and in most cases persons on a spousal visa without the right to seek local employment.

Financial Emigration (FE) is exactly what it says, it is a financial status change that one can elect to undergo, provided you have left SA to take up or have been granted a permanent residence permit, outside the CMA [Common Monetary Area, being SA, Namibia, Lesotho and Swaziland).

It is correct that the SARB financial process is subject to filing a tax emigration clearance to confirm a good tax standing, that all returns were filed, and all taxes are paid or provided for on departure.

Recently a Fin24 article quoted Claudia Aires Apicella, head of financial emigration at Tax Consulting SA, suggesting that Apicella and Tax Consulting SA is of the opinion that:

“When one “emigrates financially”, however, they cease to be a South African tax resident and will not be liable to pay any South African tax on their worldwide income. They will, however, be required to declare any South African sourced income which may be taxable, such as rental income.”

FE is not a tax emigration requirement, nor does it trigger or guarantee tax emigration or non-resident tax status. Product providers or FE specialist, now promoting FE at all cost or as the ultimate solution to escape the new #Tax2020 rules, are misleading taxpayers.

Yes, the minute your chosen adviser suggests FE is NOT an option, it is a pre-requisite or a way to tax emigrate, be scared, be very scared and obtain a second opinion from a tax specialist not earning his fees from the FE process.
What then is the best solution or option available to taxpayers?

There is no one single solution for all. The answer is in client-specific tax profiling and the following tax issues and profiles, were identified during the past years:
Expats with no tax-exempt amounts

It is of great concern, having seen how many expats South Africans, not having tax emigrated (i.e. they are tax resident or deemed to be tax resident) incorrectly believe they have been and will continue to enjoy a tax exemption on their foreign income.

The act is rather clear, and Interpretation Note 16 (Issue 2) [IN16] stipulates that the exemption is limited to remuneration from foreign employment, while passive and business income remains fully taxable for as long as one is tax resident in SA.

Passive income and independent contract income, does not qualify for to the 183/+60-day exemption; whereas
Leave days, albeit spent in SA, may qualify for exempt days to determine the proportional exemption, provided the more than 183 days were achieved.

Tax treaty protection

Most expats live and work within a country where a tax treaty may indeed protect them, provided they have tax emigrated from South Africa.
Tax emigrated expats

Many expats tax emigrated some years back, yet they have failed to notify SARS and more importantly, failed to pay the exit tax. Their tax exposure, penalty and interest liability now faced may indeed have a bigger cashflow impact than the new #Tax2020 rules.
Payroll tax at source

Working in a country that does not tax you on worldwide income, yet they tax you on the local income from employment. These tax systems rely on the source-based tax rules to collect tax against immigrant or guest employee, yet most taxpayers did not even know their employers paid the source tax on their behalf. Taxpayers are advised to ask their employers about the taxes they paid on their behalf, as SARS will allow a tax credit for said local taxes. This rule applies to both treaty and non-treaty countries.
Pay up

There are indeed a small number of expats that do not have any option but to adjust their lifestyle as they will need to adjust their new after-tax net income, as of 1 March 2020. For them #Tax2020 is painful. One such a class of taxpayers are so-called independent contractors.

Independent contractors do not earn “remuneration” and as a rule, do not qualify for the exemption. A person must, therefore, be an employee earning remuneration to qualify for the exemption.
Contract workers must be under contract and outside SA for more than 183 days while under contract. Unemployed periods spent outside SA does not count, whereas rest periods between rotational shifts (oil rig workers) do qualify as its leave periods. Contract workers are not providing a service during the period between contracts, normally fails the days’ test, because both the service as an employee and the physical presence test must be complied with to ensure the relevant tax exemption.

Officers and crew on a ship

There is a separate set of rules addressing the tax exemption of natural persons employed on a ship. There is indeed a separate Interpretation Note 34, dealing with employees on the water. Employees on the ship, not involved in the passage or navigation of the shop (mining and exploration staff, as well as operators of the onboard shops) will have to apply the rules as set out in Interpretation Note 16 (Issue 2). The main differences between Interpretation Note 16 and 34 are:

The 183 days for crew and officers are determined with reference to a tax year, whereas the other foreign workers test their days outside in any twelve months; and
The 60-days continuous and uninterrupted day rule to qualify which does not apply to crew and officers on a ship transporting persons for reward, and
Ship crew and officers will not be subject to proportional tax on the days spent within SA, whereas an employee qualifying under the 183/+60 day rule (Interpretation Note 16 (issue 2)) will have to pay SA tax on the days employed in SA, i.e. they only enjoy a proportional exemption; and most importantly
The crew and officers are qualifying for the exemption as explained in Interpretation Note 34, will not be subject to the R1m exemption cap.

SARS guidelines issued to date

Sadly, one year after the promulgation of the new act, and just one year away from implementation and SARS has issued no new or revised guidelines. Interpretation Note 16 (issue 2) was in the making for near 18 months, and the general 2018 tax guide was only issued 11 days before the 2018 tax filing deadline. SARS is notoriously slow in updating their guides and interpretation notes. It is also of great concern that they have not even issued Interpretation Note 16, draft issue 3 for comment by taxpayers and the industry.

Hopefully, SARS will soon issue Interpretation Note 16’s 3 version and even consider updating Interpretation Note 34.

Financial Emigration (FE) is indeed advisable for true emigrants, not intending to return to SA. Persons forced to return to SA or persons most likely to return to SA at the end of their work permit stay, should think twice before they allow a service provider to convince SARB they qualify as Excon emigrant.

Using FE application date to trigger tax emigration, is indeed extremely risky. An expat living in Dubai, claiming tax emigration in 2019 calendar year (the tax year 2020 or 2019) confirms they are tax non-resident because of the UAE tax treaty rules. Nothing wrong with that, yet the treaty has been in place and effective since 23 November 2016.

Should the FE applicant have been in the UAE on 23 November 2016, and now avail to the USA tax residency certificate, they are indeed admitting they may have tax emigrated on 22 November 2016. The section 9H (in its current format) exit tax charge, dates to 15 June 2015.

On 23 November 2016, as the UAE treaty became effective, many SA expats technically tax emigrated on the day before them becoming exclusive tax resident in the USA (because of the treaty). Filing tax emigration to align with the FE exit day, is most probably an incorrect and fraudulent tax position to take.

Having failed to inform SARS of the correct tax exit date, based on the physical exit date applied to the treaty tie-breaker rules, may result in an understatement tax penalty.

The physical exit date is normally disclosed on the FE application form (MP 336(b) and a copy are filed with SARS). Should SARS later decide to audit or verify the tax exit date or final tax return filed following the approval of the tax emigration clearance certificate [TEC], one may not claim the benefit of tax prescription (reading tax certainty).

It follows that, because of the incorrect and incomplete tax disclosure, SARS is not bound by the three-year prescription rule, i.e. they can issue new assessments after say five years.
The SARB FinSurv [Excon] approved FE, does not change your tax status.

Only the SA Income Tax Act (ITA) may be used to determine tax emigration status, yet in certain instances, the resident definition in ITA section 1, allows treaty country residents, to be tax non-resident.

Reading the tie-breaker rules or applying said rules may not be adequate. The definition of a resident in the treaty overrides the ITA definition with the result that expat in Dubai may be tax non-resident while on a work permit only, whereas an Australian expat on a work permit will remain SA tax resident.

The Australian treaty [DTA] excludes from the word resident, any person paying tax in Australia, on Australian sourced income only. The UAE DTA does not contain this similar restriction, most probably because the UAE does not levy any income tax on natural persons.

In Australia, a resident pay tax on worldwide income as of the date they qualify or is granted permanent residence status. Expats in Australia, availing to a work permit only, does not pay ATO taxes on worldwide income. The SA/ Australian DTA excludes from the term resident, an expat on a work permit only (because the ATO only tax work permit residents on source income only). Therefore SA expat can’t claim tax emigration status.
In Conclusion

Expats living outside SA must first ask the following questions before they agree to financially emigrate:

Can I avail to tax treaties and tax emigrate, as this is not subject to financial emigration? If yes, on what date was the tax exit? If it was in the past (for UAE could have been 22 November 2016), should I file for SARS availing to the Voluntary Disclosure Options to back date the process?
Can I claim tax credits in SA, as I have paid the necessary tax in the country of employment? It could be that your employer is paying on your behalf, do ask the HR department.
If you are not in a treaty country, can I tax emigrate based on facts and intention?
Could the FE option be part of the building blocks to show intention to exit? If so, was the tax exit date this year or sometime in the future?

Why should I complete the Financial Emigration process? Here is some reasons:

To cash out a retirement annuity
To be able to re-invest into SA via my for offshore trust or non-SA company to ensure I am not exposed to SA estate duty
To exit large funds (more than R20m per family) sourced from past savings or huge inheritance?
Why is the service providers placing so much emphasis on FE, insisting I incur the huge costs?
Should I not obtain a formal tax opinion from a person not selling FE to one and all, but only to persons that could show a clear benefit?

https://www.thesouthafrican.com/does-financial-emigration-answer-expat-income-tax/ – Written by Hugo van Zyl