Ordinarily resident status
SARS interpretation note
SARS has on 20 June 2018 reissued Interpretation Note 3 (Issue 2) (see 183 TSH 2018), setting out its interpretation of the expression ‘ordinarily resident’, appearing in the definition of ‘resident’ in s 1(1) of the Income Tax Act.
A natural person is resident for income tax purposes if he or she is either ordinarily resident in the Republic or meets the requirements of the so-called physical-presence test (Interpretation Note 4; see the Monthly Listing), subject to the application of a relevant tax treaty.
The ‘ordinarily resident’ concept is important, since we have a residence-based tax system, under which a resident is subjected to tax on worldwide income and capital gains.
A tax treaty between countries trumps domestic fiscal legislation and thus must be considered first. Once published in the Government Gazette, tax treaties have effect as if enacted in the Income Tax Act (s 108(2)).
A treaty’s provisions and those of the Act should, therefore, if at all possible, be reconciled and read as one coherent whole.
But, in the context of the definition of ‘resident’, if there is a conflict between the definition and a more specific definition in a tax treaty, the more specific definition in the treaty takes precedence.
In any event, the precedence of a more specific tax treaty definition is built into the definition of ‘resident’, which excludes a person deemed to be exclusively a resident of another country for purposes of the application of a treaty.
Thus a natural person so identified as a resident of another country and not to be a resident of South Africa for purposes of a treaty is excluded from being a ‘resident’ as defined.
Ordinarily resident status
The factors considered include a taxpayer’s intention, most fixed and settled place of residence, habitual abode, business and personal interests, family and social relations, and frequency and reasons for visits.
Ceasing to be ordinarily resident
A natural person ceasing to be ordinarily resident in the Republic will not be ‘resident’ in South Africa from the day that person ceased to be ordinarily resident.
According to the Interpretation Note, a natural person cannot be resident under the physical-presence test in the year that person ceases to be ordinarily resident, since para (a)(ii) of the definition of ‘resident’ provides that it applies only to a natural person who is not at any time during the year of assessment ordinarily resident in the Republic.
The question whether the physical presence test is met in subsequent years of assessment (in which event ‘resident’ status can be re-acquired) will depend on the facts of a particular matter.
Although the Interpretation Note does not refer to s 9H of the Income Tax Act, bear in mind that the capital gains tax is triggered on both domestic and cross-border assets the day before cessation of ‘resident’ status.
[In 176 TSH 2017, I changed my view about when a new nonresident starts counting days, and I stick to it. SARS is wrong.—ED]