If you’re planning to officially cease your tax residency in South Africa, there are several key steps and requirements you’ll need to navigate. As more South Africans take their financial plans abroad, understanding SARS’s recent updates on tax residency is essential.
Jeneen Galbraith, Director at specialist accounting and tax firm, Galbraith Rushby offers expert advice on the process, costs and what to expect if you do decide to make the break.
The process to cease residency
SARS now requires you to submit a formal declaration along with a motivation letter and supporting documents. Once reviewed, SARS will issue a certificate of non-residency. This new process is a big change from earlier years when there was no formal way of notifying SARS and then later years, it was enough to simply enter your exit date on your tax return. Today, SARS are sometimes retrospectively applying their new process to some former residents who left years ago. .
As part of the process you are required to choose the basis on which you are ceasing your residency:
- Ceasing to be ordinarily resident (i.e., the date from which you decide that you will no longer live in South Africa indefinitely)
- Ceasing to be physically present in South Africa (normally applies to someone who became resident by being physically present in South Africa for a certain number of days – you must have been out of the country for more than 330 consecutive days.)
- Exclusive resident of another country (annual submission to SARS based on the tie-breaker rules)
Most people cease to be ordinarily resident and the date normally coincides with the date they physically leave the country. If the date is different, you may be required to justify the date you chose to exit. If there is a dispute with SARS, the decision would ultimately be determined by a court, and your actions/circumstances surrounding your case would be considered.
You are required to submit a motivation letter regarding why you consider yourself to no longer be a South African tax resident. Factors such as your right to live in the other country, where your family are, your employment, your wider family etc.. It is not a requirement to be a tax resident of the other country, unless you are exiting on the basis of an exclusive resident of another country.
Exit tax: What you’ll pay
Leaving comes with its own costs. When you cease to be a South African tax resident, this triggers an exit tax payable on all of your assets, excluding South African property and assets that are part of a South African permanent establishment. Examples of assets which are excluded are cash in the bank, currency, personal use assets and certain employee share options that have not vested. Examples of assets which are included are shares in private South African companies, share portfolios, cryptocurrency, foreign property, and shares held in foreign companies.
The gain is calculated as the market value of the asset (on the day before you cease residency) less the base cost (i.e. generally the purchase price) or the value of foreign assets when you first became a resident. The tax payable depends on your tax bracket but is a capital gains tax, with the current maximum rate being 18% payable on the gain you would make if you sold the asset. This can be particularly harsh when overseas property or shares are included. This tax is generally not deductible in the other country when you sell the asset, as its not covered by the double taxation agreements.
This tax is payable through the provisional tax system on the day before you cease your residency.
Retirement funds
You may only withdraw your retirement funding 3 years after ceasing residency. You will need an emigration certificate and a tax directive which will determine the tax to be deducted and withheld. If you continue receiving monthly annuity payments, South Africa will tax these, unless you submit an RST01 form, stamped and signed by the country which you move to.
“SARS is attempting to change the current law and apply an exit tax to these funds however, they have not yet promulgated this. But we do expect to see changes to this in the future,” says Galbraith.
Life as a non-resident taxpayer
Ceasing tax residency doesn’t automatically remove all ties to South African tax obligations. As a non-tax resident, you are still required to pay taxes in South Africa on South African sourced income – for example rental income earned from an SA property which you decide to keep. If you come back to SA in the future and work here, this income/salary could be considered SA sourced income and will trigger South Africa taxes.
If you do not expect to continue to earn any SA sourced income, you must suspend your tax number. If you continue to earn SA sourced income, the year that you depart will be split into two parts and each part is considered a separate year of assessment, with the tax rebates being apportioned.
Avoiding a re-trigger of SA tax status
If you intend to return to South Africa on multiple visit’s and for lengthy stays you should ensure that you do not re-trigger SA tax residency.
There are two possible scenarios which could occur: SARS considers that your initial application was a failure based on the fact that you had no intention of actually leaving SA and thus reinstate your tax status. Alternatively, you could re-trigger SA residency by exceeding the days requirement under the physical days presence test.
This test states that if you spend more than 91 days in the country in each year of a 5-year period and a cumulative 915 days over this period and if you exceed 91 days in the 6th year, you will re-trigger SA tax residency on the 1st of March of the 6th year. When you first leave the country, in order to break the physical days presence test you need to ensure that there is a year in which you do NOT spend more than 91 days in the country. The first year of assessment would be the period after ceasing SA tax residency up to the 28 February.
“Leaving your South African tax residency behind can be a lengthy process with significant tax implications, but it’s manageable with the right steps and supporting documentation,” says Galbraith. By following these guidelines, you can enjoy the benefits of a seamless transition without facing unexpected tax hurdles down the line, and if, at some point in the future, you decide to return to South Africa, your tax status can be re-instated, and your same tax number will be re-instated.
Before making the move, consult with your tax practitioner to ensure you have a clear understanding of SARS’s requirements and have given due consideration to the potential costs involved.
[Author: Jeneen Galbraith]
