The South African Revenue Service’s (“SARS") focus on South Africans abroad was first revealed in the 2017 Budget Speech. Their reasons were only revealed in the pursuant Parliamentary debate, where in the Q&A session it was shared that National Treasury and SARS had been keeping a close eye on expatriate tax compliance.
The SARS and South African Reserve Bank (“SARB”) statistics painted a compelling picture of widespread non-compliance among South Africans who had left.
Ceasing South African Tax Residency pre-2022
South Africa operates on the generally accepted worldwide best practice principle of a residency basis of taxation. The rule is very simple, where you are tax resident, you have to disclose your worldwide income to SARS.
Furthermore, your estate also falls under South African estate duty, which is 20% on the first R30-million and 25% on the dutiable value of the estate above R30-million, there are also various anti-avoidance provisions that apply to you, and you are also liable to donations tax and deeming provisions contained in our tax law.
Where you are non-resident for tax purposes, these rules no longer apply to you. The question is: how do you get SARS to acknowledge that a taxpayer is non-resident for tax purposes?
Previously there was a SARB process, which required that you get an Emigration Tax Clearance Certificate, which later was called an Emigration Tax Compliance Status (TCS) PIN. Recently, SARS started to issue, or decline, a Certificate of Non-Residency as an additional step, which has become a golden ticket for anyone wanting to confirm their tax non-residency.
There is in tax law the famous “mischief rule”. This means that any new law or SARS action is typically explained by some mischief that the fiscus wants to address. Where SARS introduces a new step or verification, the prudent advisor will always have an understanding of the underlying reason for the change.
There appear to be at least two reasons why SARS has decided that expatriates require an additional step on ceasing their tax residency –
Abuse of the “Tick Box”
There appears to have been abuse of the SARS non-residency tick box, where the formal process of ceasing tax residency was ignored and expatriate tax returns were merely filed by ticking a box, declaring non-residency.
SARS surprised the market with a move not seen before – they kept the “tick-box” declaration on the 2022 annual tax return form, but they do not allow the taxpayer on e-Filing to tick the box!
Budget Speech Warning
In the 2020 Budget Review, SARS directly addressed the influx of taxpayers ceasing residency and concerns around abuse of the system, confirming that they would be separating this process from the exchange control statuses of taxpayers, to allow for “strengthening the tax treatment” and in doing so creating a “more stringent verification process”, “risk management test” with “certification of tax status”.
This promise has certainly been met, and taxpayers applying for non-residency now must work through additional paperwork and a barrage of SARS status verification requests to cease their residency.
SARS Auto Assessments Introduced a New Step
As part of this project, SARS updated the income tax return forms, which we have seen is in certain cases to the detriment of compliant taxpayers. The cessation of tax residency “tick-box” now being greyed out on the return form, with additional new processing now required to update the form, means that a taxpayer is no longer able to “simply tick the box” but rather needs to request an update to their SARS registered residency status on e-Filing. This is a process which must be followed and can result in a new audit on their tax affairs for residency confirmation.
Unfortunately, for the diligent taxpayer who previously underwent the “old” process to cease tax residency, their status has been reset as well. Thus, regardless of having ticked the box in prior returns or even acquiring a Tax Clearance Certificate for Emigration and SARB confirmation, it will still be needed to update your residency status to indicate your cessation date and file a non-resident tax return.
The question which can be asked is whether the non-pulling through of a taxpayer’s non-residency status is an IT glitch, the case of one hand not speaking to the other (in who has issued the Emigration Tax Clearance or Emigration Pin), or a deliberately planned step for enhanced compliance.
Nevertheless, it appears SARS has again shifted the goal posts on the formal declaration and updating of a taxpayer as a non-tax resident of South Africa. Fair warning was given in the 2020 Budget Review, in which a more stringent process was announced.
However, this unfortunately also impacts diligent taxpayers who may find themselves in a position where they need to re-verify their non-resident position to submit annual tax returns, to ensure alignment with their factual status.
Written by Nicolas Botha, Compliance & Processing Manager at Tax Consulting SA