What are the next steps and what should you know about the recent changes in rules?
In the last decade we have seen a vast increase in South Africans emigrating, and the number of people leaving the country continues to increase on an annual basis. Recent changes to the tax residency rules therefore need to be understood as they could result in the need for those emigrating to prepare and submit provisional tax returns.
Before we get to whether you will need to pay tax and prepare a provisional return, it is important to understand why the current changes have been put in place, as it certainly seems like an additional hassle most emigrees would want to avoid.
SA has a residence-based tax system and in principle, this means that an individual who qualifies as a ‘resident’ for tax purposes in SA will be taxable in SA on their worldwide income, unless certain exemptions apply. Non-residents, on the other hand, will only be taxable in SA on income generated from a source located within SA.
With effect 1 March this year, non-SA tax residents may access their full retirement benefit before reaching normal retirement age, subject to certain requirements which need to be proved to the satisfaction of SARS.
To be eligible, you must have ceased to be a resident for an uninterrupted period of three years or longer on or after 1 March 2021 and informed SARS of this; stopped contributing to the fund and the withdrawal must be affected prior to the election to retire from that fund; and a tax directive must be obtained from SARS before any lump sum can be paid out.
SARS has provided some guidance to the fund administrators of what documents need to accompany the tax directive application, but the list is not exhaustive.
Firstly, it is important to understand that your tax residency status determines how you are taxed and what you must pay tax on in SA. Filing a tax return is not determined by your tax residency status but rather whether you need to pay tax in SA.
The upshot of all this is there are now many aspects that need to be considered and addressed when your tax residency changes. Ultimately, the onus is upon the taxpayer to inform SARS and attend to the necessary requirements.
When should my change in tax residency be reported?
Prior to 2017, you could not indicate to SARS on your tax return that you have ceased to be a SA tax resident. Taxpayers would have submitted a letter to SARS containing all the information regarding a change in their residency status.
From 2017, taxpayers were required to indicate their tax residence status on their ITR12 return, however only if you ceased to be a tax resident in that year of assessment. SARS recently announced that following some recent changes made to the ITR12, taxpayers will now be able to indicate the date during any year of assessment that they ceased to be a SA resident. If you are reporting the change much later than the actual event, the changes will apply retroactively. If the change in your residency status results in tax payable to SARS, you may need to consider the submission of a voluntary disclosure (VDP) application, which would abscond you from any penalties that would otherwise be levied.
Also note that upon submission of the return, it will automatically be referred for manual intervention and SARS will request the necessary information from you. SARS has also indicated that, in the case of a back-dated residency change, they may request a tax residency certificate from the foreign tax jurisdiction.
It is also important to note that all taxpayers are required to inform SARS within 21 business days of any changes to their registered particulars.
What are the tax consequences?
Section 9H of the Income Tax Act deals with the tax treatment in respect of your change in tax residency in SA. In terms of this section, you are deemed to dispose of your worldwide asset base at market value and which triggers a capital gains tax event. You are deemed to dispose of the assets on the date immediately before the day on which you cease to be a SA tax resident and will also be deemed to buy back your asset base on the date you so cease to be a SA tax resident. SARS also deems there to be an additional period of assessment during that tax year.
Crucially, the change in your tax residency status could result in tax payable and you will then be required to prepare and submit a provisional tax return and make the necessary payment. It was recently proposed that when the duration of the year of assessment does not exceed six months then a first provisional return and payment will not be required.
There are still many uncertainties which, we believe, will be clarified later this year when the draft amendments are released. Until then, make sure you adhere to the new rules as closely as possible to avoid pitfalls and unnecessary penalties.
Juanita van der Merwe is a tax compliance manager at boutique tax consulting practice AJM.