Melissa Brink, a Structured Solutions analyst at Bravura, an independent investment banking firm specialising in corporate finance and structured solutions, explains the importance of determining whether a natural person is a resident of South Africa.
When the South African Revenue Service (“SARS”) considers a natural person to fall within the ambit of either of two categories below, they will be regarded to be a “resident” of South Africa, and therefore subject to tax on their worldwide income.
In terms of the South African Income Tax Act, a “resident” means any-
(a) “natural person who is –
(i) ordinarily resident in the Republic; (“ordinarily resident test”) or
(ii) not at any time during the relevant year of assessment ordinarily resident in the Republic, if that person was physically present in the Republic –
(aa) for a period or periods exceeding 91 days in aggregate during the relevant year of assessment, as well as for a period or periods exceeding 91 days in aggregate during each of the five years of assessment preceding such year of assessment; and
(bb) for a period or periods exceeding 915 days in aggregate during those five preceding years of assessment,
in which case that person will be a resident with effect from the first day of that relevant year of assessment” (“physical presence test”)
(subject to exclusions)
In order to fall within the “ordinarily resident” definition, certain subjective (and objective) criteria must be considered. The criteria to be considered have been developed over many years in case law by the courts. When it becomes clear that a certain individual meets these criteria, it can be found that the individual is “ordinarily resident”, even though they were not physically present in South Africa in that particular tax year of assessment.
Caution must be taken when an individual spends time abroad, perhaps with the intention to emigrate eventually. If the individual does not arrange his/her affairs in such a manner to make it clear that they have emigrated (or that it has always been their intention to do so), it can still be possible for SARS to assess that they are “ordinarily resident” in South Africa in that particular year of assessment.
A good example is the approach taken in Cohen v CIR (1946 AD 174, 13 SATC 362), where the Court considered factual circumstances, such as the taxpayer’s temporary visits outside South Africa and the fact that the taxpayer and his family would always return to their home in South Africa, even though they were not physically present in South Africa for an extensive amount of time.
The Court held that “ordinarily resident” was not determined solely by the facts applicable to a specific year of assessment and that it does not necessarily preclude the Court from looking at other factors such as the taxpayer’s life prior to leaving South Africa or even the year after that. The Court thus found that a person can be ordinarily resident even if they are not physically present in a specific year of assessment.
Individuals should further be cautioned that there is a difference between emigrating from South Africa for exchange control purposes (financial emigration) and no longer being regarded as tax resident in South Africa. A person can live abroad for a number of years but still be regarded as a South African resident (for tax purposes and exchange control purposes). A South African resident is a person, whether South African or any other nationality that has taken up residence, is domiciled or registered in South Africa for exchange control purposes.
In order for a South African resident to emigrate from South Africa for exchange control purposes (and become permanent resident in another country), they need to apply to the Authorised Dealer, i.e. a commercial bank in South Africa, prior to departure from South Africa to obtain access to the facilities as per the Exchange Control Regulation, 1961, read with the Currency and Exchanges Manual for Authorised Dealers. These facilities would include, for example, the foreign capital allowance (of up to R10 million for a single person and R20 million per family unit) per calendar year.
When an individual emigrates for exchange control purposes, they are deemed to have disposed of all their assets on capital account, and all assets exceeding the foreign investment allowance is subject to payment of an exit charge.
After submission of all the relevant documentation to the Authorised Dealer, an individual will formally have emigrated from South Africa (for exchange control purposes), once they receive a reference number or approval of their emigration from the South African Reserve Bank.
Even once a person has emigrated formally for exchange control purposes, they can still remain or become tax resident in South Africa, based on the amount of time spent in South Africa, in accordance with the “physical presence test” (or if they are regarded as being “ordinarily resident” in South Africa). If an individual is tax resident in South Africa, they will be subject to tax in South Africa.
Individuals should be mindful of the fact that while they may not be considered to be tax resident in South Africa, they will still be subject to the exchange control regulations in South Africa if they have not formally emigrated for exchange control purposes. A person will only be considered non-resident for exchange control purposes once they have formally applied to the Authorised Dealer to emigrate from South Africa.