One SARS mistake could cost South Africans living overseas

South Africans living abroad should ignore confusing “tax emigration” terminology and instead ensure SARS correctly records their tax residency status to avoid compliance and tax risks.

This is according to Tax Consulting SA’s Legal Manager of Cross-Border Taxation, Delano Abdoll, and Expatriate Tax Support Specialists, Asamkele Tyala and Carmen Sevenster.

“South Africans who work or reside abroad are increasingly encountering confusing terminology and mixed signals on their obligations with the South African Revenue Service (SARS),” they said.

“This is not a SARS-created problem. There is an influx of opportunistic advisors claiming expertise in this area, each trying to find their own voice.”

Abdoll, Tyala, and Sevenster explained that AI-generated content and salespeople often add to the confusion expats already face.

Even some well-qualified attorneys or foreign exchange experts make mistakes when discussing international tax matters.

“International tax is an exact science, and it becomes more complex where you need to navigate this through SARS e-filing, which is a rigid tax compliance platform.”

There are frequent claims that the term “financial emigration” no longer exists, that expatriates need to “tax emigrate”, or that they must be tax resident in another country to claim non-residency.

All of this comes despite SARS being on record, confirming that this is not necessarily a requirement. Other phrases include “ceasing tax residency”, “divorcing SARS”, and “immigration”.

Abdoll, Tyala, and Sevenster said that these phrases simply describe the same part of the Income Tax Law and the exact same SARS process.

The underlying tax law governing how one ceases or commences tax residency has not changed, and the key SARS Interpretation Notes 3 and 4 have, at best, seen only minimal adjustments to the technical wording.

For high-net-worth individuals, the compliance framework has changed significantly, but mostly because of the taxman’s access to third-party information.

“The law itself has not changed – you just have much sharper enforcement,” Abdoll, Tyala, and Sevenster explained.

“What has changed is the following. SARS has become the primary authority responsible for verifying and recording a taxpayer’s tax residency status.”

SARS has also replaced the South African Reserve Bank (SARB) as the main authority responsible for verifying and recording a taxpayer’s tax residency status.

South Africans registered as tax residents must update their tax residency status with SARS before their bank can process any related exchange control requirements. Before March 2021, this process started with the SARB.

The process differs for foreign nationals who are already registered as non-residents for tax purposes, as they do not need to relinquish South African tax residency.

Once SARS has verified a taxpayer’s status and compliance, their bank can complete the remaining exchange control processes.

Key legal considerations for South African expats

Abdoll, Tyala, and Sevenster explained that there are four fundamental legal principles South African expats need to consider. First, South Africans can cease South African tax residency in one of two ways:

• By demonstrating that they have ceased to be ordinarily resident in South Africa; or
• By demonstrating that, under an applicable Double Tax Agreement, they are exclusively tax resident in another jurisdiction.

Second, it is the taxpayer’s responsibility, both procedurally and under law, to change their tax residency status with SARS.

Where the taxpayer has not discharged their onus of proof, SARS can, under law, treat them as a tax resident and hold them liable for worldwide income tax, capital gains tax and estate duty.

The taxpayer must follow the necessary steps to demonstrate that they have ceased to be tax resident in South Africa.

Simply stating an intention to leave South Africa is insufficient. SARS will consider all the relevant facts and circumstances before reaching a conclusion.

Third, where reliance is placed on a Double Taxation Agreement, the taxpayer must similarly substantiate that position for each year of assessment in which treaty relief is claimed.

This is where most inexperienced tax consultants, forex agents, and policy encashment experts get it completely wrong.

They often claim non-residency with SARS using the ordinary residency route vs the Double Tax Agreement route, which has different outcomes for the client.

Finally, Abdoll, Tyala, and Sevenster said South Africans living abroad must ensure that SARS’ records accurately reflect their tax residency status.

Too many simply assume that a previous advisor or family friend correctly handled the process without ever verifying how SARS records tax residency status.

They should confirm that SARS’ records correctly reflect their status and, where recognised as non-resident, obtain SARS’ confirmation of that status.

If SARS recognises someone as a non-resident for tax purposes, that person must obtain an official SARS Notice of Non-Resident Tax Status.

This record must be retained under the law for 5 years, but they recommended keeping it permanently. It is useful not just in South Africa, but wherever South African expats later move.

Why expats should still care about SARS compliance

While South African expats may not care about SARS compliance, Abdoll, Tyala, and Sevenster stressed that they really should.

Firstly, the Tax Administration Act obliges taxpayers to ensure that information provided to SARS is accurate and up to date. Failure to comply may, in certain circumstances, constitute a criminal offence.

This, in itself, should be a warning to most South Africans that being on the wrong side of SARS’ world-class system is simply not smart.

Secondly, their tax status determines how the revenue service treats their third-party data received from all over the world.

This is at the core of Automatic Exchange of Information and of global frameworks such as the OECD’s Common Reporting Standard and the US Foreign Account Tax Compliance Act.

All financial institutions, including banks and investment firms, are required to report taxpayers’ details to the South African Revenue Service.

Where SARS’ records correctly reflect a non-residency status, the South African sourced-income principle applies. However, if someone is still a normal tax resident, they will be taxed on their worldwide income.

Thirdly, many South Africans retain a nexus with their birth country, making the correct tax status and a compliant tax record non-negotiable for ordinary ease of living because:

• They may inherit from South Africa.
• They own or plan to own property in South Africa.
• They may still have a South African bank account, investments, retirement annuities or pension interests, or wish to transfer South African funds in the future.
• As many South Africans find overseas wealth, they miss home and have the means to spend more time in South Africa.

The key legal question, Abdoll, Tyala, and Sevenster said, is whether a taxpayer remains a South African tax resident or has legally ceased to be one.

While this is not a new requirement, taxpayers can no longer simply tick a box on their tax return. They must submit documents to SARS to support their non-resident status.

Since SARS took over the process, updating a taxpayer’s status has become simpler and more efficient. For straightforward cases, professional assistance is available for under R4,000.

However, taxpayers should use experienced cross-border tax professionals, as incorrect applications can lead to additional questions or a SARS audit.

Expats should also be wary of advisers who make the process seem more complicated than it is to justify higher fees.

Ultimately, the goal is to regularise their affairs with SARS so its records correctly reflect that they are no longer a South African tax resident.

The ideal outcome, Abdoll, Tyala, and Sevenster said, is official confirmation from SARS recognising your non-resident tax status.