Amidst the panic created by the amendments to s 10(l)(o)(ii) of the Income Tax Act, which, with effect as from 1 March 2020, will subject to tax in the RSA foreign employment income in excess of R1 million earned by RSA taxpayers with resident status, the Band-Aid solution touted is ‘financial emigration’.
This expression baffles me, since no such term appears in either the exchange control or the tax legislation or regulations. Presumably, what is being referred to is, merely, normal emigration.
A former head of the SARB’s exchange control division (now called ‘Financial Surveillance’) has confirmed to me that the correct term is ‘emigration’.
Emigration rationale and the tax test
The rationale behind emigration is that, as part and parcel of the process, you acquire nonresident status in the eyes of the SARB and of SARS, and that this status renders s 10(l)(o)(ii)—which applies only to RSA residents, as distinct from nonresidents—irrelevant.
Yet the true test for nonresident tax status is a tax test not requiring emigration. (There are non-tax pros and cons to emigration, but that is a different topic.)
Interpretation Note 3 (Issue 2) issued by SARS on 20 June 2018 [slightly edited on 3 August 2018—Ed] examines the concept of a natural person being ‘ordinarily resident’ (184 TSH 2018).
At para 4.2, SARS states that the concept of ordinary residence must not be confused with the terms ‘domicile’, ‘nationality’, ‘citizenship’ and the concept of ‘emigrating’…for exchange control purposes.
In evaluating the tax test for nonresident status, you have regard (a) to the so-called double tax agreements (DTA) between the RSA and the country in which you reside; (b) the meaning under our tax case law (including the famous Appellate Division judgments in Cohen and Kuttel) of the expression ‘ordinarily resident’; and, if nonresident, (c) the physical presence/absence test, considered by SARS in its Interpretation Note 4 (Issue 5), of 3 August 2018.
Two sides of the same coin
As the saying goes, there are two sides to the same coin, and, if you achieve the hallowed status of being nonresident for tax purposes, there are the following issues to consider:
- If you emigrate (or become officially non-tax-resident) there is a capital gains tax exit charge under s 9H, on a fictitious deemed disposal of worldwide assets, which could be as high as an effective 18% on the resulting gain, whether realised or not. (And also an income tax exit tax charge, on trading stock, livestock and produce.)
- Given that the RSA tax system is both residence and source-based, any taxable income derived from RSA-sourced investments, bank accounts and the like remain subject to RSA tax, unless a DTA provides otherwise.
Choosing your tax residence?
You cannot unilaterally declare and decide your tax residency status. The question of a natural person’s tax residence is one of fact, and each case is decided on its own merits.