With the introduction of a formal SARS Non-Resident Tax Status Confirmation Letter in 2021, South African expatriates may finally relax knowing that their foreign income is safe from local taxation. However, getting one of these is neither automatic nor easy, requiring applicants to follow stringent residency cessation and verification processes to qualify as non-residents for tax purposes.

"The letter is only a confirmation that the underlying process was successfully completed, and that the applicant met SARS' criteria for tax non-residency," says Thomas Lobban, Legal Manager, Cross-Border Taxation at Tax Consulting South Africa.

For this reason, the confirmation letter is gold in the hands of an emigrant taxpayer, provided of course they meet the requirements of the process itself.

Background

Effective March 2001, all South Africans are legally required to declare and pay tax on their annual worldwide income, regardless of where they are currently located on the planet. This is unless they can objectively prove to SARS their intention to remain outside the country permanently.

The operative words are 'objectively' and 'permanently'. SARS does not assume that anyone who leaves South Africa for an extended period is gone for good and will continue to treat them as resident taxpayers. "Legislation places the burden of proof on the taxpayer, who must provide verifiable objective evidence that they do not intend to return on a permanent basis," says Lobban.

If they prove their case to SARS' satisfaction, they will be marked as non-resident on the tax authority's database and can thereafter be issued with a confirmation letter. If not, they will receive a rejection letter. 

A need for confirmation

Since the tax residency policy was adopted in 2001, South Africans have often found themselves in something of an expatriate limbo. Regular changes in legislation have left them confused and uncertain if they are truly free from SARS in terms of their foreign earnings.

Although they are issued with an Emigration Tax Clearance Status Pin upon properly ceasing their tax residency, this certificate confirms their emigrant status for tax purposes but is only valid for a year. This has left open the question of indefinite confirmation of South African non-resident status.

The confirmation letter, launched in 2021, provides a clear indication of that status change, and can be presented to foreign tax authorities, to encash policies and remit funds, such as retirement annuities or inheritances, if necessary. The confirmation letter also has no expiry date, making it a long term solidification of your status.

The risk of rejection

SARS can reject an emigrant taxpayer's application for tax non-residency status confirmation for several reasons, for example:

• They did not correctly follow the process to cease their tax residency 
• The objective evidence they provided does not sufficiently prove their intention to exit the country permanently 
• Their tax affairs are not in order

These points should be cause for concern, especially if an applicant is unsure of their tax compliance status, as it could trigger an unwanted tax audit.

"SARS' validation process is thorough enough that the very act of applying may expose a taxpayer to significant risk if they are non-compliant," says Victoria Lancefield, Tax Compliance Expert at Tax Consulting South Africa.

Expert assistance

Somewhat surprisingly, the requirements for tax residency are not always well known to many tax practitioners. This can raise risk insofar as SARS engagement is concerned. To mitigate this threat, Lancefield recommends that applicants engage a tax consultancy with:

• Proven experience in SARS' non-residency process
• A thorough knowledge of the documented evidence SARS expects
• Daily dealings with SARB and its exchange control requirements
• Solid accounting competency to facilitate the remittance of funds
• A strong legal component

A competent firm should further help the applicant develop a long-term roadmap of their new life abroad and collect sufficient evidence of its permanence. This is the recommended best practice for approaching SARS.

"Most importantly, applicants should submit themselves to an independent tax diagnostic that assesses their real tax position before they apply, detects anomalies that could compromise them, and provides guidance on becoming fully compliant," says Lancefield. Such risk makes it inadvisable for taxpayers to apply for non-residency themselves.

Submitted by Tax Consulting SA