July 11, 2022
South Africa | Overview of procedure to cease tax residency
Tax implications of ceasing tax residency
Under current law, a taxpayer must notify the South African Revenue Service (SARS) when s/he elects to become a nonresident. On becoming nonresident, a deemed disposal arises for Capital Gains Tax (CGT) purposes where the taxpayer is deemed to have disposed of his or her worldwide assets on the day before s/he becomes nonresident. Excluded from this deemed disposal are assets which remain in the South African tax realm or are specifically excluded per legislation. These may include immovable property in South Africa (including shares in a property rich company), assets belonging to a permanent establishment in South Africa and all personal use assets (e.g., furniture and jewelry). The taxpayer is deemed to have reacquired the same asset base at market value on the day they become nonresident.
Once an individual is considered a nonresident, s/he will be subject to tax on only South African source income. Thus, foreign income and gains will no longer be taxable in South Africa.
Taxpayers have 21 days to notify SARS of any change in registered particulars, which includes their tax residency status. Where there is an exit charge payable, it is important to note that this could affect provisional tax payments, penalties and interest for the shortened year of assessment.
From 1 March 2021, a taxpayer no longer needs to apply to the South Africa Reserve Bank (SARB) to formally emigrate. SARS may, however, want to perform a strict audit to ensure that factually a taxpayer is no longer resident, and any applicable CGT exit charge has been remitted.
Procedure to cease tax residency with SARS
Initially the taxpayer could inform SARS of its decision to cease residency through the following two channels:
A taxpayer should therefore now capture the emigration by amending the RAV01 particulars which should then, once reviewed by SARS, follow through to the ITR12. Taxpayers ceasing tax residency in terms of the physical presence test need to only supply the standard documents listed below.
Taxpayers ceasing residency as a result of the application of a Double Taxation Agreement will need the standard documents and a certificate of tax residency from the relevant Foreign Revenue Authority, or if they do not produce such certificates, a letter from the Foreign Revenue Authority stating that they are tax resident in that country.
Taxpayers ceasing residency in terms of the ordinarily residence test will need to supply a motivational letter and further specific supporting documents listed below.
The onus is on the taxpayer to prove that s/he is not subject to tax in South Africa, and by implication the onus is on the taxpayer to prove that s/he has become nonresident for South African tax purposes as and when declared.
Standard supporting documents include:
Specific supporting documents and details include:
Some confusion has arisen in the expatriate community on the difference between an Emigration Tax Compliance (TCS) pin and a SARS letter of confirmation of nonresidency.
The Emigration TCS pin is a confirmation that one receives when successfully undergoing the emigration process with SARS. The issued TCS pin is an electronic mechanism used to enable third parties to view the TCS verification result and to indicate the approved amount the taxpayer wants to transfer offshore. The pin is only valid for one year from the date of issue. The SARS Nonresident Tax Confirmation Letter must also be obtained after all formal processes above have been complied with. The letter can also be obtained in respect of SARS emigration which happened previously and is often relevant for the application of Double Taxation agreements and tax rights allocations.
Prior to requesting an Emigration TCS, a taxpayer must complete the "Cease to be a Resident" process stated above. If a taxpayer will retain South African tax residency upon emigration, an Emigration TCS should be applied for to receive the approval to transfer funds offshore.
In the calendar year a taxpayer ceases to be tax resident, s/he is entitled to transfer up to R1 million offshore as a travel allowance, without the requirement to obtain a TCS pin. This is a once-off allowance and it cannot be used in subsequent calendar years.
The change from the emigration process with SARB and a move towards a simplified emigration process with SARS, which includes tax residency confirmation letters, should be welcomed by all emigrants. However, it is important to be aware that SARS does intend to scrutinize the declarations and supporting documents and will likely be sending letters to request further documentation and details. To avoid delays, it is important that all relevant documentation be provided when first submitting the application.
The recent case in the first-tier tribunal tax Chamber, in the matter of Oppenheimer v HMRC (2022), addressed a South African tax resident who was also tax resident in the United Kingdom. The case determined that the tie breaker clause in the Double Taxation Agreement (DTA) granted exclusive residency to South Africa. The importance of this case is it shows the amount of detail the courts are prepared to go into in determining where an individual is tax resident and the amount of supporting documentation required to provide evidence of one's stated intention. It is likely that SARS will use this case to audit emigration applications and to provide guidance on the proof required to show one has become nonresident in South Africa.
Impact on certain retirement funds
If a taxpayer emigrates from 1 March 2021, s/he will only be able to access a retirement annuity and preservation funds benefits (unless there is still the right to one withdrawal) if s/he have been a nonresident for three uninterrupted years and can provide proof of this to SARS upon withdrawal.
During 2021, Treasury proposed to tax the above-mentioned retirement interests as a deemed withdrawal upon emigration, with the tax due being paid later. This was contradictory to various DTAs and thus the proposed amendment was withdrawn. However, it is understood that Treasury plans to amend the various applicable DTAs in 2022.
Withdrawal on resignation of employment related benefit funds is still possible, resulting in the above three-year limitation not having a very wide application.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Advisory Services (Pty) Ltd., Johannesburg
Ernst & Young Société d'Avocats, Pan African Tax — Transfer Pricing Desk, Paris
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
Ernst & Young LLP (United States), Pan African Tax Desk, New York