Outstanding tax liabilities, administrative penalties, unfiled tax returns or unresolved verification and audit matters with the South African Revenue Service (SARS) could put a spanner in the works for South Africans living and working abroad who are seeking recognition as non-residents for South African tax purposes.

Whether applying through the cessation of tax residency process or seeking relief under a Double Taxation Agreement (DTA), taxpayers often focus primarily on proving that they have established tax residency in another country.

Recent experience indicates that SARS is placing increasing emphasis on a taxpayer’s overall compliance status when considering applications for non-resident tax status. Any non-compliance may result in an application being delayed, subjected to additional scrutiny or, in some cases, rejected — even where the taxpayer has a strong case from a tax-residency perspective.

A Growing Trend

Historically, the primary consideration in a tax residency application was whether the taxpayer could demonstrate that they had ceased to be ordinarily resident in South Africa or qualified for treaty relief under an applicable DTA.

While these factors remain fundamental, SARS is increasingly adopting a broader approach by reviewing the taxpayer's overall compliance profile as part of the application process.

In a number of cases, taxpayers who otherwise met the requirements for recognition as non-residents experienced difficulties because of unresolved compliance issues reflected on their SARS profiles. In these instances, the compliance concerns effectively became a barrier to the successful conclusion of the application.

Common issues that may attract SARS' attention include:

• Outstanding tax liabilities
• Administrative penalties
• Unfiled tax returns
• Returns selected for verification or audit
• Outstanding SARS correspondence
• Incomplete supporting documentation
• Discrepancies in taxpayer registration details
• Outstanding compliance obligations relating to other tax types

When Compliance Becomes the Obstacle

A recent matter handled by our team serves as a useful illustration of this trend.

The taxpayer had relocated abroad and had a strong factual basis for being recognised as a non-resident for South African tax purposes under a DTA. The application was supported by the necessary documentation and evidence demonstrating foreign tax residency.

Despite this, SARS initially raised concerns because the taxpayer's profile reflected compliance-related issues that required attention. While the taxpayer's residency position itself was not necessarily the point of contention, the compliance concerns had a direct impact on SARS' consideration of the application.

Fortunately, after the relevant matters were addressed and the application process carefully managed, SARS ultimately confirmed the taxpayer's non-resident status.

The case serves as a valuable reminder that meeting the legal requirements for non-residency may no longer be sufficient on its own. SARS expects taxpayers to be compliant before it will approve a significant change to their tax profile.

Why SARS Is Taking This Approach

From SARS' perspective, recognising a taxpayer as a non-resident has far-reaching tax implications for the fiscus.

A successful non-resident application may impact:

• Ongoing South African filing obligations
• The taxation of foreign income
• Access to Double Taxation Agreement relief
• Retirement fund and pension withdrawals
• Offshore investment planning
• Capital Gains Tax consequences associated with ceasing tax residency

Given these implications, SARS appears to be placing greater emphasis on ensuring that taxpayers' affairs are fully compliant before granting or confirming non-resident status.

What Taxpayers Should Do Before Applying

Taxpayers considering a non-resident tax status application should first conduct a comprehensive review of their SARS profile to identify and address any potential compliance issues that may impact the outcome of the application.

One of the most effective ways of doing this is by obtaining a Tax Diagnostic Report, which provides a detailed overview of a taxpayer's compliance status and highlights any issues requiring attention before a non-resident tax status application is submitted.

A Tax Diagnostic Report can assist in identifying:

• Outstanding tax returns that still need to be submitted
• Outstanding tax liabilities or amounts owing to SARS
• Administrative penalties imposed by SARS
• Returns selected for verification, audit, or other SARS reviews
• Discrepancies or inaccuracies in the taxpayer's registered particulars
• Active tax types and registrations that may require attention
• Outstanding SARS requests, notices, or correspondence
• Potential compliance risks that could delay or jeopardise a non-resident tax status application
• Areas where supporting documentation may be required

By proactively addressing these matters before approaching SARS, taxpayers can significantly improve their prospects of a successful application while reducing the likelihood of delays, additional queries, or rejection based on compliance concerns.

The Takeaway

The landscape surrounding non-resident tax status applications is evolving. While proving foreign tax residency remains fundamental, SARS is viewing tax compliance as an equally important factor in the decision-making process.

Taxpayers who intend ceasing South African tax residency or applying for non-resident status under a Double Taxation Agreement should not wait until the application stage to address compliance concerns which can become significant obstacles delaying or jeopardising an otherwise valid application.

In today's environment, obtaining recognition as a non-resident is not only about demonstrating where you live. It is also about demonstrating that your South African tax affairs are fully compliant and in good standing with SARS.

In today's increasingly stringent compliance environment, a Tax Diagnostic Report has become an essential first step for taxpayers seeking recognition as non-residents for South African tax purposes.

Written by Alex Mahundla, Tax Compliance Specialist at Tax Consulting SA; and Chrispos Seete, Tax Compliance Specialist at Tax Consulting SA