Understanding and Changing Your Tax Residency Status in South Africa
South Africans who have settled in other countries may not be aware that a change in tax residency is not automatic. As a result, these expatriates fail to notify the South African Revenue Service (SARS) of their tax status change, thereby remaining a resident of South Africa for tax purposes.
It is important to note that tax residency is independent of citizenship. Tax residency refers to the country or jurisdiction where an individual or entity is considered a resident for tax purposes. It determines which country has the right to tax a taxpayer’s income, wealth, and other financial activities.
Mbalenhle Mahlaba
Expatriate Tax Consultant
Understanding the Importance of Informing SARS
Notifying SARS of any changes in your tax residency status is crucial for managing your tax obligations effectively. While taxpayers may assume that SARS will automatically update their status based on their work or residence abroad, this is not the case. SARS will only adjust a taxpayer’s tax residency status if they are formally informed of a taxpayer’s relocation or intent to change tax status.
Since South Africa operates on a residency-based tax system, a taxpayer’s tax liability depends on whether they are considered a resident of South Africa for tax purposes. South African tax residents are liable to tax on their worldwide income, irrespective of where the income is earned.
Taxpayers who fail to notify SARS of their intention to change their tax status will continue to be taxed as a South African resident, which may potentially lead to double taxation. To ensure that taxpayers’ tax affairs reflect their factual reality, they must promptly inform SARS of any intention to change their tax status.
How to Cease Your Tax Residency
To cease your tax residency in South Africa, there are two main options, namely, by completing the financial emigration (FE) process, or through the application of a Double Taxation Agreement (DTA).
Both options provide relief from South African taxation on foreign income but are suited to different situations.
- Financial Emigration: Permanent Change of Tax Residency
Financial emigration is a process that allows a taxpayer to permanently cease tax residency in South Africa. This is a one-time change of status, typically undertaken when taxpayers have no intention of returning to live and work in South Africa.
Once the financial emigration process is complete, the taxpayer’s South African tax residency is officially terminated, and the taxpayer will no longer liable for South African tax on their foreign income.
- Double Taxation Agreement: Temporary Cessation of Tax Residency
A DTA is an international agreement between two countries designed to prevent double taxation on the same income. Taxpayers temporarily moving to another country, with the intention to return to South Africa in the future, may consider using a DTA to temporarily cease their South African tax residency.
Under a DTA, a taxpayer must prove to SARS that they meet the required criteria to claim relief. This typically involves obtaining a tax residency certificate from the country wherein the taxpayer resides, along with providing other evidence showing that the taxpayer is a tax resident of South Africa. A DTA does not automatically apply; taxpayers must provide evidence that the DTA applies to their circumstances and inform SARS thereof in order to claim tax relief.
Confirming the Change in Tax Status
How to Confirm If Your Tax Residency Status Has Changed
It is important for expatriates to not assume that their tax status will automatically change after completing financial emigration or applying for relief under a DTA. All taxpayers should verify their tax residency status and cessation date on the SARS eFiling platform, to ensure that they are formally recognised by SARS as tax non-residents.
SARS will not adjust a taxpayer’s status merely on the basis of an email or the updating of personal details. SARS requires sufficient evidence of the change in a taxpayer’s tax status. If the evidence is inadequate or the proper process has not been followed, a taxpayer’s application may be denied.
SARS will conduct an audit on the evidence submitted by the taxpayer. If SARS is satisfied that the taxpayer has ceased their South African tax residency, they will issue a Notice of Non-Resident Tax Status letter, confirming the taxpayer’s tax status and cessation date.
Generally, if a taxpayer has not received official confirmation from SARS confirming their tax-non residency, they should assume that SARS still considers them tax resident.
Conclusion
The cessation of tax residency in South Africa is not an automatic process. Whether taxpayers apply for relief under the DTA or through the FE process, it is crucial to take proactive steps to notify SARS and submit all necessary supporting documentation evidencing the change in their tax status.
By understanding the process required to cease South African tax residency and by seeking professional advice, taxpayers can avoid unnecessary tax liabilities and ensure an efficient transition from tax residency to tax-non residency.