South Africans living abroad need to be mindful of the impact that this has on their tax obligations and ultimately, which country has a taxing right. Your tax obligation ultimately depends on your tax residency status. 

There is a common misconception amongst expats in that their tax obligation to Sars falls away once they have physically left the borders of South Africa. This misguided belief has potential to land the taxpayer in hot water with Sars, as they bear the burden of formally declaring to Sars any change in tax status. 

In order to declare a change in tax status, from resident to non-resident, expats who have left South Africa with a permanent intention to remain abroad, are required to obtain a Sars non-residency tax status confirmation letter. This letter serves as confirmation that the taxpayer ceased their tax residency from South Africa with clear indication of the date their tax residency was ceased. 

Tax Residency – A Regime Change

The introduction of a residency-based tax regime in March 2001, means that South African tax residents are taxable on their worldwide income, regardless of the source. An updated tax status from resident to non-resident, does not automatically apply by simply physically leaving South African borders. 

It is important to be mindful that, citizenship and tax residency are not aligned. This means you may retain your South African citizenship and not be taxed in the country, by mere fact that you live abroad and do not have significant ties to South Africa. 

Non-South African tax residents are taxed differently in that they are only taxed on their South African-sourced income. Remember that the any change in status is not automatically updated and can only be done by undergoing a formal process with Sars to cease such tax residency.  

Proof of non-residence

To evidence a change in tax status, from resident to non-resident, expatriates who have left South Africa with a permanent intention to remain abroad, are required to obtain a Sars Non-Resident Tax Status Confirmation letter. Tax residents can backdate their application to the date they factually emigrated with the permanent intention to live abroad. 

To be able to apply for the Sars Non-Resident Tax Status Confirmation letter you must have already completed the tax emigration process through Sars. If Sars does not issue this letter at the taxpayer’s request, it is an indication that the taxpayer has not changed their tax residency on Sars’ system or that the change previously made has been deleted, thus requiring the taxpayer to reapply. 

Incorrect Rejection

Expatriate taxpayers who have emigrated before the tax regime change to a residency basis of taxation have experienced some difficulties recently, with Sars rejecting applications to update tax residency status in instances where a taxpayer has emigrated prior to March 2001. This is incorrect as a taxpayer who emigrated prior to the regime change may still be a South African tax resident.

Remedial Steps 

We have had the unsavoury experience of having clients’ applications rejected due to their emigration date being prior to March 2001. This leaves taxpayers in a precarious position, and they can either:

• Bury their head in the sand and naively hope that Sars do not attempt to tax them on their worldwide income;
• Resubmit their application for a change in their tax residency status with the hope that this will be subsequently approved; or
• Engage formally with Sars with a view of remedying the situation.

Conclusion 

The rejection letter shared above is contradictory to existing formal processes of ceasing tax residency, as a change in status does not automatically apply upon emigration, nor upon emigration prior to the regime change. Non-resident taxpayers still bear the burden of legally declaring their change in position and not formally noting this to Sars will keep individuals listed as a South African tax resident. This has the consequence of the taxpayer being taxed on their worldwide income, regardless of source of income. It is of utmost importance that taxpayers seek assistance from reputable astute tax attorneys who are comfortable with engaging with Sars and can correctly apply the law.

Written by André Daniels, Legal Manager of Tax Controversy & Dispute Resolution; and Kivashna Veerasamy, Tax Attorney at Tax Consulting South Africa