Where you live is not always the place where you pay your taxes, especially if you are a South African expat.
Tax residence is not a decision an individual can make by shouting ‘I’m an expat, get me out of here!’
Deciding where you pay your taxes is an arcane process that involves counting the days you have spent in country over the past five years or so and investigating your social and financial ties to test if you have really gone or are just saying so to avoid paying your dues.
To make the decision even more complicated, where you live and work outside South Africa also have a tax call on your cash and the terms of a double taxation agreement come into play.
Confused? Hopefully this iExpats tax toolkit for South African expats answers your questions.
When do expats pay tax in South Africa?
Let’s look at what residence means for expats.
Someone who is ordinarily resident or who meets the requirements of the physical presence test is a tax resident.
This includes someone who lives in another country but intends to return to South Africa when they have finished their time abroad.
But someone who is tax resident in another country cannot be tax resident in South Africa at the same time even if they are ordinarily resident in South Africa or meet the physical presence test.
Who is ordinarily resident?
Unhelpfully, there’s no legal definition of ordinarily resident. The rules have roots in cases that have come before the courts over the past 75 years.
These are the main points:
- If a South African lives in another country but intends to return to South Africa and considers the country home, then they are ordinarily resident in South Africa
- The decision over where someone is ordinarily residence is not a single year snapshot of their life, but considers a longer period of at least five or six years
Social and financial factors also come into play, like:
- Do they need a work permit, visas or permanent residence while abroad?
- Where does close family live?
- Do they keep money, investments and property in South Africa?
What is the physical presence test?
The physical presence test counts the days someone has spent in South Africa over recent tax years.
To meet the physical presence test and be considered ordinarily resident, someone must answer yes to each of these questions for the tax year SARS is assessing:
- Were 91 days or more spent in South Africa during the tax year?
- Were 91 days or more spent in South Africa in each of the five tax years before the tax year under assessment?
- Were 915 days or more spent in South Africa during the five tax years before the tax year under assessment?
To meet the test, in practice someone must spend an average 183 days in South Africa for six tax years in a row to become ordinarily resident.
There is a get-out clause for the physical presence test.
What is the 330-day rues for expats?
If an expat spends 330 consecutive days outside South Africa, they are classed as non-resident from the last day they met the test.
Counting the days shows why expats should keep a reliable diary that shows where they spend their time in and out of South Africa. SARS will check passports but the responsibility of proving residence falls on the taxpayer.
Expats should also be careful of what they wish for.
Always check out the tax residence qualifications and tax rates of the country where you intend to live and compare the data with tax rates in South Africa as they can vary between countries.
How the ZAR1.25 million exemption works
SARS expat tax rules workhand-in-glove with double taxation agreements with other countries.
The rule-of-thumb about double taxation treaties is they do not affect tax residence nor stop expats paying tax but are a way for countries to decide who gets what first.
The examples assume an expat who is aged 45 earns ZAR3 million a year and is ordinarily resident in South Africa
- Zero tax countries – If the expat works in the United Arab Emirates.
As the UAE has no income tax, no local taxes are deducted from the ZAR3 million.
In South Africa, the expat tax exemption is applied (ZAR3 million – ZAR1.25 million) leaving a taxable amount of ZAR1.75 million, which is taxed at a rate of 45% (ZAR787,500), leaving the expat with ZAR962,500 net.
- Higher tax rate countries – If the expat worked in another country, say the UK, where the tax rate is comparable with or higher than South Africa, then the ZAR3 million would be taxed at UK rates (ZAR925,000).
In South Africa, the tax calculation stays the same (ZAR787,500 tax) but a double taxation agreement comes into play giving the expat a tax credit equal to the tax paid in the UK
- Lower tax rate countries – If the expat works in a country where the tax rate is higher than zero but less than the tax rate in South Africa, say 25%, then the ZAR3 million is taxed locally (ZAR750,000).
In South Africa, the tax calculation stays the same again (ZAR787,500) but the expat must hand over a balancing payment of ZAR37,500 – the difference between foreign tax paid and South African tax due on the ZAR3 million.
If an expat works in South Africa for part of a tax year and abroad for another part, the ZAR1.25 million exemption only applies to income from outside the country.
VDP: Telling SARS late about expat income
If you are late telling SARS that you an expat because you are worried you cannot afford to settle your tax account, then you should consider the Voluntary Disclosure Programme (VDP).
SARS is encouraging expats to take this route and offering reduced penalties in return.
It’s not too late to take part in the scheme providing SARS is not already auditing your finances or a criminal investigation is underway.
Sometimes, fraud or tax evasion is discovered during the VDP inquiry, but in most cases, SARS will promise:
- Not to prosecute and tax offence arising from the VDP
- Will discount understatement penalties
- Will waive any administrative penalties except for late filing charges
At the end of the VDP process, you will have a clean slate for your tax affairs and no more worries about investigations and penalties.
Making a VDP disclosure
The VDP process comes with a list of rules about how to make the disclosure:
- The application must be voluntary
- The tax issue must have happened within five years of the application date
- The taxpayer must make a full and honest declaration
- The taxpayer must have understated the tax they should pay when filing a tax return
- The VDP should not result in a tax refund
- The application must be made through the correct channels and on the correct forms
The VDP agreement
A successful VDP application leads to an agreement between the taxpayers and SARS over the amount of any penalties and how any tax due should be paid.
Failing to keep to the terms of the agreement could lead to SARS cancelling the deal or withdrawing any penalty discounts. Breaking the agreement could also trigger prosecution for any tax offences disclosed during the VDP process.
Why consider VDP?
Since 2018, South Africa has taken part in the Common Reporting Standard.
The CRS is a global network of tax authorities that swap tax data with each other. Basically, if you are listed as ordinarily resident in South Africa and have bank accounts, savings or investments with a financial institution in another country, the tax authority there will tell SARS.
That means if you have understated your tax in South Africa, then SARS knows and sooner or later you will get a nudge letter asking if you have completed your filing in full for a tax year.
What SARS is really saying is ‘we know what you are doing and it’s time to fess up.’
How do they know – your foreign bank tells them you are a South African controlling an account in another country and the information is cross-checked against your tax filings.
A word of warning
Residence, cross-border tax and voluntary disclosures are complicated tax topics best discussed with a professional adviser with experience in the field.
If your tax affairs are in a mess, don’t bury your head in the sand because SARS will catch up eventually. It’s much better to take responsibility and sort out the muddle.
And don’t do it yourself – SARS will tie you in knots and you could make decisions that worsen your situation.
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