Hobbs Sinclair advises South African taxpayers on the complex process of ceasing tax residency.
The process of ending South African tax residency can be complex and confusing, leaving many taxpayers uncertain about the implications. South African tax residents are responsible for paying taxes on their worldwide income, including both local and foreign income, and estate duty on their worldwide assets upon death. When individuals move abroad, they may still be required to pay South African taxes on their worldwide income if they are deemed to be South African tax residents by the South African Revenue Service (SARS).
Danielle Luwes, Tax Manager at Hobbs Sinclair, warns taxpayers not to assume that they have escaped the South African tax system simply because they have left the country. She explains, “If you’re a South African tax resident, you’re liable for taxes on your worldwide income, regardless of where you are in the world. It’s important to take the necessary steps to ensure that you are no longer considered a tax resident when you take up residence in a foreign country.”
Ceasing South African tax residency requires notifying SARS within 21 days of leaving the country and registering as taxpayers in your new country of residence. After this, certain consequences follow. Firstly, the taxpayer will be liable for capital gains tax on the deemed disposal of their worldwide assets, although some exceptions may apply, for example, you will not be liable for capital tax on your South African property assets, including your personal home. This capital gains tax may affect provisional tax payments and could potentially result in penalties and interest if not timeously brought into account. Secondly, once the taxpayer is considered a non-tax resident, they will only be liable for South African taxes on domestic-sourced income. Foreign income will no longer be subject to tax in South Africa. Importantly, if you are no longer a South African tax resident, you will no longer be liable for estate duty on assets outside of South Africa.
To notify SARS about ceasing tax residency, a taxpayer must update their RAV01 on e-filing, submit relevant documents, and indicate which basis they will use to cease tax residency. There are three qualifying bases: ceasing to be an ordinarily resident, ceasing via a physical presence test, and ceasing under a Double Tax Agreement (DTA). Each basis has unique document requirements. To qualify under a specific basis, an individual must satisfy the requirements laid out in the South African Income Tax Act and the DTA between their new country of residence and South Africa, if applicable.
It is important to note that SARS is often hesitant to accept tax emigration applications and requires sufficient evidence of intent to cease South African tax residency. SARS will conduct an audit on the taxpayer to confirm tax residency status and assess all related matters, which could be extensive. Therefore, taxpayers should prepare all necessary documents ahead of time to ensure that their application is successful.
Danielle Luwes emphasises the importance of consulting with a tax professional to ensure that the short- and long-term tax implications of ceasing South African tax residency are optimised. She says, “It’s highly recommended that taxpayers consult with a tax advisor to do appropriate tax planning before they move abroad and to ensure that they meet the required criteria to cease South African tax residency.”
The process of ceasing South African tax residency is complex and requires careful consideration to avoid penalties and interest. It is essential for taxpayers to understand the implications of their actions and to seek professional advice before making any decisions.