Tax residency and the physical presence test

South Africa has a “residence” basis of tax.  Prior to 2001 South Africa applied a source basis of tax.  This meant that amounts were only subject to tax (in South Africa) if they were from a South African source.  The residence of a taxpayer was by and large irrelevant.  The source basis of tax was replaced by a  residence basis for years of assessment commencing on or after 1 January 2001.  The residence basis of tax means that South African residents are taxable on their worldwide income regardless of the source of that income.A resident is defined in section 1 of the Income Tax Act as either:

  • A person who is “ordinary resident” in South Africa.  In other words, South Africa is his or her true home.
  • A non-resident who has spent a certain number of days in South Africa, i.e.

–  more than 91 days in total in each of the current and previous five tax

years and:

–  more than 915 days in total during the previous five tax years.

The  days need not be consecutive.

Note that this “days test” or physical presence test only applies to persons who are not ordinarily resident at any time during the year of assessment.  If a person who is a resident in terms of the “physical presence, he or she is deemed to be no longer test leaves South Africa for a continuous period of 330 full days, he or she is deemed to be no longer resident from the first day of the 330-day period.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Tax residency implications for South Africans living abroad

By Daniel Banes

Currently, a South African tax resident is exempt from paying tax in South Africa on any money earned as an employee overseas if you are out the country for 183 full days in a 12-month period (of which at least 60 of those days must be consecutive).However, a proposed amendment set to come into force March 1 2020 will affect certain South Africans who have moved or are working overseas.  The government has proposed amending the legislation to the effect that money earned up to R1m per tax year will be exempt; any amount earned overseas over the R1m will be subject to possible taxation in SA.If you are living or working overseas you should consider how this may affect your circumstances so as not to be caught out by this amendment.

Tax residency

Let’s start with tax residency.  The general rule is that anyone who considers SA their home is a South African tax resident. So, if you were born in SA and live in SA   you will be a South African tax resident.

However, if you leave SA with the intension of moving permanently to another country, chances are that you are no longer tax resident in SA.  This process is called breaking tax residency and is primarily determined by your state of mind.  The South African Revenue Service (Sars) has, however, provided indicators to assist in determining whether you are tax resident or not.  Some of these are as follows:

  1. An intention to ordinarily reside in SA (most important consideration);
  2. Your most fixed and settled place of residence;
  3. Where you stay most often and your habits;
  4. Your place of business and personal interests; and
  5. Employment and economic factors.

In other words, if you leave SA with the intention of moving permanently to another country and subsequently settle in that country, it is likely that you have broken tax residency with SA.

If you have broken tax residency with SA, you don’t need to worry about the amendment to the tax legislation.

It must be kept in mind that when you break your tax residency there is a deemed capital gains event (meaning that if you do not sell assets, you are still liable for capital gains tax) on some assets held.

Proving you have broken tax residency

It is now important to determine how you can prove to Sars that you have broken tax residency so that the proposed amendments do not affect you.

Whether you are a tax resident in SA primarily depends on your state of mind, which can be difficult to prove.  This is where Sars’ factors become important.

If you’re able to show Sars that your new home and economic and personal ties (among others) are in the new country, you should be able to prove you have broken tax residency.

You can also submit a tax return to Sars indicating you have broken residency – this is an option on the first page of your tax return.  In addition, there are documents signed between countries called

double taxation agreements (DTA).  These give taxing rights to the signatory countries to the document.  for example, SA has signed a DTA with the UK.  If you’re a resident of the UK in terms of the provisions in the DTA, you can’t be a tax resident in SA.

Formal/financial emigration

The concept of formal/financial emigration is separate to breaking tax residency.  it is an exchange control concept and is dealt wit by the South African Reserve Bank.

You may wish to formally emigrate, but don’t have to.  This involves an application to the bank and will result in all your South African funds being transferred into an ‘emigrants capital account’.  Only the bank that has opened the account can deal with the funds.

However, if you’ve left the country it is not necessary for you to formally emigrate.  It has no effect on your tax residency, although it can also be used as an indicator to Sars that you’ve broken tax residency.

There are a couple of instances where you must formally emigrate:

  1. If you have a retirement annuity in SA that you wish to liquidate (unless you’re already 55 in which case you don’t need to formally emigrate); and
  2. If you have more than R10m you wish to take out of SA.

Your citizenship is not affected by formal emigration and you get to keep your South African passport.

Effect on South African assets

Breaking tax residency has no effect on your assets (besides from the deemed capital gains event):  However, if you’re earning income from these assets you must declare it to Sars and may be subject to taxation depending on the amount earned and type of income.

When you formally emigrate all your SA assets will be transferred into an emigrant’s capital account with your bank.  For example, if you have cash in bank accounts, these accounts must be closed, and the money transferred to the emigrant’s capital account.

If you have a retirement annuity that is liquidated, the money must be paid into this account.  You must get approval from your bank when dealing with these assets once they are in the emigrant’s capital account.

You are still entitled to keep any immoveable property that you own in SA, but the title deed must probably be marked that the property is now owned by a non-resident. If this property is subsequently sold, the proceeds must be paid into the account.  On a final note, if you are a South African citizen working abroad temporarily and don’t break tax residency, any tax that is paid in the country where you are working should be set off against any tax that is owed in SA on this foreign income.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Depreciation vs wear & tear

Deterioration, obsolescence and wear and tear are among the reasons why assets decrease in value. By realising a deduction on depreciation for tax purposes, your company can recover the costs of certain moveable assets that are used in the production of income.

Generally, businesses won’t be able to make use of assets like heavy machinery or computer equipment, for example, for an indefinite period. As assets work together to generate an income for your business, over time these assets will have to be replaced with newer, more efficient ones. This article briefly looks at the basic concepts of depreciation for accounting purposes and wear and tear allowances for taxation purposes.

Depreciation – Accounting

Depreciation is essentially the decline in the value of an asset over time due to the wear and tear that occurs as a result of the normal use of that asset. For accounting purposes, a company’s assets should be depreciated on a systematic basis over the assets’ useful life. In addition, the depreciation method used should reflect the way in which assets’ economic benefits are utilised by the company and should also be reviewed regularly. The different methods of depreciation include: the straight-line method, reducing balance method as well as the production unit method.

For accounting purposes, depreciation is charged as an expense in a company’s income statement and is not deductible for tax.

Wear & Tear – Taxation

Wear and tear refers to the method in which the South African Revenue Services (SARS) allows companies to write off an asset for taxation purposes over a predetermined period. This wear and tear allowance permits companies to deduct, over a period of time, the amount that was paid for the movable goods that are used in the production of income. This deduction will result in a reduction of your company’s tax liability.

The period over which wear and tear can be claimed depends on the type of asset, as each asset will have a different write-off period. SARS has a prescribed schedule (Annexure A of Interpretation Note 47) for all assets, as well as predetermined rates at which companies can claim ‘depreciation’ for taxation purposes.

Any assets purchased for less than R7 000 may be deducted in full in the year in which the asset is purchased.

Recovering Wear & Tear Allowances

When an asset is sold, the wear and tear allowances claimed need to be recouped for that asset. The wear and tear claimed for the periods that the asset was in use is then added back to the taxpayer’s taxable income in the year in which the asset was sold.

Should you have any queries resulting from this article, please feel free to contact Leonard Burger at leonard@asl.co.za.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

SARS scams

Education and awareness around identity theft, phishing and other frauds have become part of life globally. If nothing else, scamsters are innovative and keep trying new avenues of defrauding businesses and individuals. In South Africa, this is no exception, and there has been a rise in the number of scams where persons pretend to be from the South African Revenue Service (SARS), to defraud honest taxpayers. This is a particularly useful method, since reactions to correspondence from revenue authorities are often quick and drives taxpayers into immediate action. Since June 2018, SARS has identified 15 new scams (in addition to a myriad of old scams still doing the rounds). Members of the public are randomly emailed with false “spoofed” emails made to look as if these emails were sent from SARS, but are actually fraudulent emails aimed at enticing unsuspecting taxpayers to part with personal information such as bank account details.Some of the more pertinent scams recently have been:

  • Payments required for “residential tax clearance certificates”. This is particularly relevant, with all the media reports around the so-called “expat tax” due to come into operation in March 2020;
  • Receiving a “tax invoice” from SARS with a link that should be clicked on;
  • Notifications of a refund, requiring taxpayers to complete bank account and credit card details;
  • Letters of demand with threats of court summonses; and
  • Requests for verification of assessments, with links to malware.

SARS provides the following guidelines when dealing with correspondence that purports to be from them:

  • Do not open or respond to emails from unknown sources;
  • Beware of emails that ask for personal, tax, banking and eFiling details (login credentials, passwords, pins, credit/debit card information, );
  • SARS will never request your banking details in any communication that you receive via post, email, or SMS. However, for telephonic engagement and authentication purposes, SARS will verify your information. Importantly, SARS will not send you any hyperlinks to other websites – even those of banks;
  • Beware of false SMSs;
  • SARS does not send *.htm or *.html attachments; and
  • SARS will never ask for your credit card details.

SARS has also made a facility available where scams or phishing can be reported. Taxpayers can either email phishing@sars.gov.za or call the Fraud and Anti-Corruption Hotline on 0800 00 2870.

It is advisable that taxpayers are always aware of the status of their tax affairs and are in constant contact with their tax consultants, to ensure that they are not caught unaware by any of the scams.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)