Overseas Saffers must confirm their non-resident tax status with the Sars
William Louw, tax director of Sable International SA, says he has rarely seen such a flood of South Africans seeking to emigrate.
“I’ve been booked solid for weeks,” he says. “People’s reasons for wanting to leave vary, but deep down they want a plan B. They see the country deteriorating and think it could get worse, and they worry about safety, their children’s education and for some people. it’s just that there are better opportunities abroad.
Emigration is a huge decision with serious financial implications. Living abroad has a major impact on the amount of tax you pay and the country to which that tax is paid. Your tax residency status determines how you are taxed in a given country.
South Africans who have left the country must now obtain a letter from the South African Revenue Service (Sars) confirming their non-tax resident status, which is only issued to those who permanently leave the country.
To apply for the letter, you must complete the tax emigration process through Sars.
Those who live abroad without this letter could find themselves having to declare their overall income to Sars each year.
It also creates problems for those living abroad who draw life annuities from a South African fund.
“A lot of people left in the 1990s and are well past retirement age, but no longer have SA passports. The Sars eFiling system is tied to the identity document Sars has on file, which may no longer be valid. We have to help several clients to regularize their status,” explains Louw.
Understanding tax residency
Whether you reside in South Africa or abroad, you will be subject to income tax.
There are two concerns: where do you pay taxes and how do you avoid paying more than one tax on the same income?
If you reside in South Africa, you will most likely be considered a resident here for tax purposes (although there are rare exceptions). South African tax residents must pay Sars tax on their income earned in South Africa as well as on foreign income, where such income exceeds a certain amount.
Leaving South Africa does not automatically classify you as a non-tax resident. If you are a tax resident living abroad, you may be taxed on foreign income that exceeds the R1.25 million threshold. You can also be hit by double taxation, warns Louw.
However, the process to become a non-tax resident in South Africa is not automatic. The only way to change your tax status is to formally submit to the relevant legal procedures via Sars.
Understanding Double Taxation Treaties
Tax returns should always be filed in the country where you are not a tax resident first. It is possible that, in some cases, a given amount may be taxed twice since tax regimes differ from country to country. Double taxation can, however, be mitigated by various Double taxation agreements (DTA). By disclosing the tax you will pay in the country where you are tax resident, you can generally avoid double taxation.
This is where the advice of a professional tax specialist familiar with international taxation is crucial.
Benefits of ceasing your South African tax residency
The advantages of non-tax residency:
- You will only be taxed on income originating in South Africa (unless the DTA overrides normal laws).
- Only immovable property located in South Africa and permanent establishment assets will be subject to capital gains tax.
- International remittances are tax exempt. This is because tax is payable when income is earned or assets are sold, not when money flows.
Importance of Having a Sars Non-Residency Tax Letter
If you are a tax resident in South Africa, you are legally required to submit tax returns to Sars each year. You must report your worldwide income, both local and foreign, and then claim any foreign income tax exemptions or credits. If you do not formally identify yourself as a non-tax resident, Sars will automatically classify you as a tax resident in South Africa.
The non-residence tax letter is important for three reasons:
- The letter is the only way to confirm that Sars has accepted that your tax status has changed.
- An emigration tax receipt is now required to obtain funds paid overseas if you withdraw from your retirement funds before retirement.
- A non-resident tax letter is used when a non-tax resident needs to withdraw an annuity or earned income from South Africa to transfer it overseas for banks. In October 2021, the legislation changed for tax non-residents intending to claim a life annuity while living abroad. To transfer funds from South Africa to an overseas bank account, an application for a valid tax clearance certificate must now be made. Previously, it sufficed to show that we had emigrated financially and the fund could make an offshore payment. Now, the process of accessing your life annuity abroad has become more complicated, especially for elderly non-tax residents and those who have been out of the country for more than 10 years. (See: How to access your SA life annuity abroad – an eFiling guide).
Louw notes that once you are considered a non-tax resident by Sars, the Reserve Bank no longer allows you to use your one-time discretionary allowance to transfer funds out of SA. You must prove that you have a letter of non-residency from Sars or use your Foreign Investment Allowance (FIA).
“It is important to take the necessary steps, knowing that Sars does not automatically issue the tax non-residence letter (as they promised),” says Louw.
“Know your tax status and act accordingly so you are not negatively affected.”
Sable International provides comprehensive tax services and advice to South Africans at home and abroad and to anyone with South African income. He can be reached at firstname.lastname@example.org or by telephone on +27 (0) 21 657 1517.
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