Expatriate tax is complex, intricate and can be challenging to understand – especially if one does not have the basics, such as what is an expat, down pat. 

Simply, an expatriate, or expat, is an individual who has relocated from their home country to another, either temporarily or permanently. While there could be a myriad of reasons for someone leaving South Africa (SA), the implications will, nevertheless, always remain the same.

When it comes to tax, preparation is always the key. Being prepared means planning ahead of time and, where necessary, adjusting one’s strategy with a well-informed approach. 

In the context of expats - and when attempting to decode “expat tax” - preparation starts with an understanding of tax residency.

What Is a “Tax Resident”?

Different countries will have their own rules for determining whether a taxpayer is a “resident” of that country for tax purposes. It is important to note that one's citizenship does not factor into whether the person is a “tax resident” of a country (unless you are a United States or Eritrean citizen). 

For South African tax purposes, the difference between a “resident” and a “non-resident” is, in theory, simple. 

A tax resident is subject to tax in SA on all amounts derived from worldwide sources – even if they pay tax in another country.  A tax non-resident is only subject to tax in SA on amounts that arise from sources within the country. 

An individual is considered a “tax resident” if they meet one of two so-called “tests” outlined in the Income Tax Act: the “ordinarily resident test” and the “physical presence test”. These “tests” consider various factors, such as one’s ties to SA and time spent within SA during a tax year, respectively. 

When a South African taxpayer wishes to relocate to another country, it is important that they formally cease their tax residency with SARS. The burden of proof is on the taxpayer to confirm with SARS that they are no longer ordinarily resident in SA. If this is not done, the taxpayer is still treated as a South African tax resident, remaining subject to tax on worldwide income.

What Options Do Expats Have?

Expats will generally have a range of options available to them in mitigating or nullifying South African tax liability on their foreign income, or other foreign-sourced amounts. While it is difficult to cover all potential avenues for tax planning, the most common approaches can be summarised as follows:

1. Remain a South African tax resident, declare foreign income to SARS, and claim up to R1.25 million exemption for employment income earned in relation to workdays spent outside South Africa; or
2. Cease to be a South African tax resident, which can be done either on the basis of – 

- the taxpayer’s intention to permanently live outside of SA thereafter, in terms of the domestic tests for tax residency (as mentioned above); or

- an intention to permanently return to SA in the future, provided the country in which the taxpayer is living, with which SA has a Double Tax Agreement (“DTA”) also treats them as a tax resident under its domestic tax laws.

It is crucial that individuals who plan on relocating to another country, whether this is on a temporary or permanent basis, ensure optimal planning from a tax perspective to avoid any double taxation or unnecessary tax liability in either country.

The Crux of It All

The first consideration in relation to expat tax is their intention – whether this wish to cease their tax residency permanently through financial emigration or temporally via a DTA. 

A temporary intention to live abroad means that the taxpayer must consider their circumstances more closely to determine the correct approach – either claiming a tax exemption in SA for up to R1.25 million of pre-tax foreign employment income (also known as the “expat tax exemption”), or they may instead elect to formally cease their South African tax residency in terms of a relevant DTA. 

Inaction is not an option when it comes to tax in SA. For expats who have not updated their South African tax status, or who have not declared any foreign-sourced amounts to SARS, it is time to critically consider obtaining professional advice and rectifying their affairs. 

In many cases, remaining non-compliant in one’s disclosures with SARS is frankly unnecessary.

Filing Tax Returns – What Now?

Always remember that the burden of proof is on the taxpayer. When declaring information to SARS, evidence is paramount. Start with dessert and get your documents together first. This will be the most important aspect of any engagement with SARS, whether you are simply filing a tax return, submitting a non-resident declaration to SARS, or any other tax-related matters.

If you consider yourself to be a non-resident for South African tax purposes, or if you want to become a non-resident, examine your intention. Furthermore, do not be confused by any special terms used by different advisors – “tax emigration,” “financial emigration,” and “ceasing tax residency,” are irrelevant. Either one remains a South African tax resident (declaring worldwide amounts to SARS), or they cease to be a resident under the Income Tax Act, alternatively, in terms of a DTA.

For those who believe that SARS already considers them to be a non-resident, do you have a “Notice of Non-Resident Tax Status” from SARS? You would obtain this document from SARS when you cease to be a tax resident by way of the DTA or domestic process. This document serves as proof of one having ceased tax residency in SA, therefore protecting their foreign-sourced income, in accordance with the process qualified for. 

This has now become a critical SARS requirement.

Failing to Plan is Planning to Fail

Expatriate tax is a topic that can be daunting for both laypersons and tax experts alike. However, for this reason, it is important to plan ahead, before taking steps with SARS. Putting the right foot forward, from the get-go, and with proper advice, will set the tone relative to one’s tax affairs for years to come.

Written by Chavaughn Phillips, Team Lead: Expatriate Tax at Tax Consulting SA; and Mbalenhle Mahlaba, Expatriate Tax Consultant (BCom Law & LLB) at Tax Consulting SA