“Expat tax” is scaring a lot of South African expats at the moment. The biggest change has been the repeal of Section 10(1)(o)(ii) of the Income Tax Act, which in effect removes the foreign employment income exemption that we’ve had to date. What this boils down to is that Treasury wants you to pay tax on your foreign earnings.

That has scared South Africans all over. Many people are confused. People who have been outside the country for ten or twenty years want to know if this is going to affect them. In a nutshell, the answer is, “No”. The changes to the Income Tax Act can only affect you if you are a resident, or deemed to be a resident, in South Africa. This is determined by the physical presence test and the ordinary residence test. You don’t have to worry too much if you don’t fall into one of those two categories.

The physical presence test

The physical presence test is a calculation of the amount of time you spend in South Africa. The test consists of three requirements and you must meet all three requirements before you will be regarded as a resident of South Africa. If you spend 91 days during the current tax year in South Africa, and if you spent 91 days in South Africa during each of the preceding five years, and if you spent a total of 915 days in South Africa over those five years, you meet the three requirements and will be regarded a resident.

The ordinary resident test

There is no set definition for an ordinary resident. The South African Revenue Service (SARS) regards a person as an ordinary resident if South Africa is your permanent home where your assets and your family are based and where you return to when you stop wandering the globe. You can still be deemed an ordinary resident in South Africa even though you’ve spent a number of years abroad.

Dual residency

The question then arises: Are you a resident of South Africa only or are you a dual resident? And if you are a dual resident, where do you pay tax?

If you have been working abroad for the past ten years, you are a dual resident because you’re a tax resident in the country where you have been working, but equally an ordinary resident in South Africa. In this case you have to determine if there is a double taxation agreement (DTA) in place and, if so, where that agreement assigns residency. The DTA ultimately gives exclusive residency to one of the two countries. You cannot pay income tax in two different countries.

The first thing SARS look at is where you have a permanent home available. If that is only in South Africa, you are automatically assigned residency here. If you have a permanent home available in both countries, they determine where your centre of vital influence is – where you live, where your family and assets and social life are. If you spend time in and out of SA but your family is in South Africa, the DTA is going to assign residency to South Africa. If you live abroad on a more regular basis, have family there and your kids are at school there, it is quite clear that you reside abroad and the DTA will assign residency to that country. Then you become a resident of that jurisdiction for tax purposes only. In that case the change in the South African Income Tax Act is not going to affect you whatsoever.

If you are a tax resident abroad as per the DTA, you will not be expected to pay any tax on your foreign income to SARS. However, you will still pay tax on your South African assets. If, for example, you have property in South Africa that you rent out, you will still pay tax on that income in South Africa.

Moving abroad

If you sell everything in South Africa, including your home and car, and move abroad to live there full-time you will also not be affected by the new regulations. Your ordinary residence will then be abroad and that is where the DTA will assign residency, so you will not be taxable in South Africa.

South African expats in Dubai

If you live in Dubai, and maybe have even bought property there, and you don’t have any assets in South Africa, you will also escape SARS – provided you can prove to SARS that you became an ordinary resident in the UAE or that the DTA assigned residency to the UAE. The changes in the South African Income Tax Act will not affect you, even though you are not paying income tax.

You can also apply for treaty relief but then you must apply for a tax certificate or a certificate of residency each year.

Financial emigration

If you fall outside the ordinary residence definition, or if the DTA assigned residency to another country, there is no need for financial emigration. Formal emigration may be your personal choice, but it is not technically required.

Proper emigration

There has been a lot of talk about people having to emigrate properly to escape this tax completely. You probably won’t have to do that, but remember that everything is based on your personal circumstances. You must determine where you reside – either in terms of the DTA or a residence test – and plan accordingly.

Contact Fanus Jonck (tax@jonck.net) with your tax queries.